About this site

Wednesday, May 6, 2009

Unknown Waiting on a friend April 1865James River, Virginia. View of the completed Dutch Gap canalMain Eastern theater of war, the Army of the James, June 1864- April 1865

Ilargi: Looking at numbers can be interesting, and no more so than when they're misleading, whether that happens intentionally or not. Early in the week, we got a bit of reality through Stephanie Pomboy, courtesy of an article by Abel Abelson in Barron's, entitled Shotgun Wedding.

" ... an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity." As to the Fed's claim that the equity of homeowners as a group stands at 43%, she points out that what the Fed neglects to tell you is that roughly a third of them have their houses free and clear. Lo and behold, some basic arithmetic reveals that 67% of homeowners with mortgages have equity of less than 15%. That [..] suggests the "destruction priced into the credit markets hardly seems out of whack with potential reality."

And while, thanks to "the transfer of toxic assets to taxpayers" and the magic of accounting legerdemain, the scarred financials to some significant extent may be spared further pain, the same, alas, can't be said for the nonfinancial sector. Little recognized, she insists, is how much the extraordinary gains in domestic nonfinancial profits from the low in 2001 to the peak in 2006 -- a stunning rise of 388% -- owed to the housing bubble. "Who in his right mind," she asks, "would believe that explosion in profits during the housing-bubble stretch a mere coincidence and, therefore, in no way subject to the same inexorable decline?"

In other words, the Fed says homeowner equity is 43%, but "forgets" to mention that for 33% of owners, equity is 100%, since they own outright. For the remaining 67% who have mortgages, average equity is no more than 15% at best.

A report from Zillow's today states that 21.8% of all homeowners are underwater. But Zillow's too, as Barry Ritholtz points out, omits the fact that a third of US homes don't have a mortgage. Hence, among those that do, 33% owe more on their property than it's worth. This affects a total of 20.4 million homes, and, if we estimate 3 inhabitants per home, 60 million Americans. In 2008, plunging values cost homeowners $2.4 trillion.

Looking out over the landscape, it seems safe to predict that at least as much will vanish in 2009. If we add to that Meredith Whitney's claim that some $2.5 trillion in consumer credit card lines will go "poof" in the night, Americans stand to lose $7.5 trillion in spending power before the year is over. That is well over half of annual GDP, which, coincidentally, relies for over 70% on that same consumer spending power. Allow me to suggest that you read that last line once again, and think it over real well.

And we can add more fun to the numbers game: job losses. Luckily, we are treated to three greatly varying sets. The widely reported ADP index says 491.000 private sector jobs were lost in April, and not surprisingly, that had the more gullible part of the "markets" up in a wet panties tizzy. Not to be outdone, Bloomberg states "... a government report on May 8 may show payrolls fell by 610,000 in April". A curious detail is that the same article says "Government employers and auto companies announced the largest cutbacks, accounting for 39 percent of the layoffs.". See, the ADP index tracks only the private sector. Now we're starting to find that governments are among the biggest pink-slippers; and while that is not unexpected, it's not exactly a promising development.

But we're not done, there's a third unemployment estimate, this one from TrimTabs Investment Research. They claim that the U.S. economy dumped 745,000 jobs in April. And while Bloomberg reports that the jobless rate probably jumped to 8.9 percent, the highest since September 1983, TrimTabs predicts 10% by summer. And remember: that's U3. The more believable U6 recently passed 16% and shows no signs of slowing down, let alone looking back. A number never addressed, but very disturbing if you ask me, and also coming from TrimTabs, is this: "... wages and salaries plunged an adjusted 5.7% year-over-year."

Anywhere between 6 and 10 million people will lose their jobs, millions will lose their homes as well, while those that can hang on lose another 10%+ of their residences’ values, and for many their monthly payments, on Alt-A and Option-ARM loans, will go through the roof. Enjoy your rally if you like, your neighbors may not.

According to Zillow.com, nationwide, the number is 22%, up from 18% Q4 2008. In California, 32% percent of homes are worth less than what’s owed on them. If we are thinking about the bank stress test, then unencumbered homes — those owned free and clear without any mortgages — are not relevant to the discussion. As we noted over the weekend, if you look at only the subset of homes with mortgages, the numbers are much worse. Nationally, 22% of all homes are underwater, then consider the total of homes purchased with credit. Back out the mortgage-free homes, and we get 33% of all mortgaged homes are underwater. This is significant in terms of the results of the stress tests, and the banks ability to withstand further deterioration of their balance sheets. (For stress test purposes, homes without mortgages are not relevant) Here’s Bloomberg:

"A growing number of U.S. homeowners owe more than their properties are worth after prices extended their two-year decline in the first quarter, Zillow.com said. Almost 21.8 percent of all owners were underwater as of March 31, the Seattle-based real estate data service said in a report today. At the end of the fourth quarter, 17.6 percent of homeowners owed more than their original mortgage, while 14.3 percent had negative equity three months earlier. Property values dropped 14 percent from a year earlier in the first quarter, reducing the median value of all U.S. single- family homes, condominiums and cooperatives to $182,378, Zillow said. The gain in underwater homeowners will lead to more bank repossessions, the company said."

The recession cut home values by $2.4 trillion last year. In a separate survey of homeowner sentiment, 31 percent of homeowners said they would be at least "somewhat likely" to put their property up for sale in the next 12 months should they see signs of a recovery. This implies that any housing "recovery" will be about stabilization and stopping sales/price erosion — not about regaining higher prices anytime soon . . .

A growing number of U.S. homeowners owe more than their properties are worth after prices extended their two-year decline in the first quarter, Zillow.com said. About 21.8 percent of all owners were underwater as of March 31, the Seattle-based real estate data service said in a report today. At the end of the fourth quarter, 17.6 percent of homeowners owed more than their original mortgage, while 14.3 percent had negative equity three months earlier. Property values dropped 14 percent from a year earlier in the first quarter, reducing the median value of U.S. single- family homes, condominiums and cooperatives to $182,378, Zillow said. The decline has left about 20.4 million of the U.S.’s 93 million houses, condos and co-ops with loans higher than the properties are worth. The gain in underwater homeowners will lead to more bank repossessions, Zillow said.

Many owners "would be more willing to bear the financial consequences of bankruptcy or foreclosure," Stan Humphries, Zillow’s vice president of data and analytics, said in an interview. "You are going to continue to see home prices fall for the rest of this year and some portion of next year." The recession cut home values by $2.4 trillion last year, First American CoreLogic said in a March 4 report. More than 8.3 million U.S. mortgage holders owed more than their properties were worth and an additional 2.2 million borrowers will be underwater if prices decline another 5 percent, the Santa Ana, California-based seller of mortgage and economic data, said in the report.

The data demonstrates the challenges facing Federal Reserve Chairman Ben S. Bernanke and the Obama administration as they seek to spark a housing recovery. The Fed has pushed 30-year fixed home loan rates to a record low by purchasing mortgage- backed securities. The jobless rate jumped to 8.9 percent last month from 8.5 percent in March and employers cut at least 600,000 workers from payrolls for a fifth straight time, according to the median estimate in a Bloomberg News survey ahead of a May 8 Labor Department report. The U.S. market with the biggest drop in home values in the first quarter was Salinas, California, where the median price fell 37 percent to $301,793 from year earlier, Zillow said. About 32 percent of all homes there were worth less than what’s owed on them, Zillow said. Among the worst-performing markets, Salinas was followed by Redding, Stockton, Madera, and Vallejo-Fairfield, all in California. The company estimates values for homes, whether or not they are sold in the period tracked, in 161 metropolitan areas.

In 85 of the markets tracked, the annualized home-value change over the past five years was negative or little changed. About 20 percent of all home transactions in the past 12 months were foreclosures, and short sales made up about 12 percent. A short sale is when a home is sold for less than the outstanding mortgage balance. The data for Zillow’s study dates to 1996 and comes from public records, the closely held company said. Its mortgage figures come from information filed with individual counties. The decline in values is holding potential sellers back from putting their properties on the market, the company said. In a separate survey of homeowner sentiment, 31 percent of homeowners said they would be at least "somewhat likely" to put their property up for sale in the next 12 months should they see signs of a recovery. Harris Interactive surveyed 2,123 adults, 1,266 of whom were homeowners, on line last month, Zillow said.

Americans’ trust in the financial system has been "shattered" in the past 18 months, says Elizabeth Warren, the Harvard law professor who chairs the Congressional Oversight Panel. She says we’re on our way to restoring that trust, but only as the nation’s elites wake up to a new reality: "What we’re having to do is change an entire culture. Let’s be clear: The folks who’ve been running these multibillion-dollar institutions – they are accustomed only to talking to other people who run multibillion-dollar institutions. And the rest of you can stay far, far away. What has fundamentally changed is they’re now taking taxpayer dollars. And the taxpayers think that gives them a seat at the conversational table and the decision-making table. And it’s taking a while for those CEOs to figure out the game has changed. And I do believe the game has changed."

Warren acknowledges that some Wall Street CEOs keep acting as if the old rules apply. She is appalled at Wall Street’s continued practice of handing out oversized bonuses, as evinced by the latest revelations about AIG’s 2008 pool or recent increases in bonuses across the industry. The idea that firms need to pay up to retain top talent "carries zero" weight with the bailout monitor, who also disagrees with the criticism the Obama administration is overreaching in its dealings with Wall Street. The president, she says, is calling shots as a major shareholder, representing the taxpayer.

"We’re going from a world in which folks at the top only talked to each other, and maybe their regulators on occasion," Warren says. "It was a very quiet and very private conversation involving billions of dollars. Once you take taxpayer money.... it’s a three-way conversation." In that light, Warren believes there will be more public "conversations" like the AIG hearing. She believes faith in the system may be restored by a modern version of the Pecora Commission, which investigated the banking industry after the 1929 crash, although she dodged our question as to whether she would want to lead it, as some have proposed.

Private-sector employment in the United States fell by 491,000 jobs in April, the smallest decline in six months, according to the ADP employment index released Wednesday. The relative improvement was widespread across industries, said Joel Prakken, chairman of Macroeconomic Advisers, the consulting firm that computes the index for payroll giant Automatic Data Processing Inc. from hundreds of thousands of anonymous payroll reports. Goods-producing industries cut 262,000 jobs, including 159,000 in manufacturing and 95,000 in construction. Services cut 229,000 jobs in April. It was the first month since October in which goods-producing industries cut more jobs than the services did.

The index comes two days before the government releases its estimate of April nonfarm payrolls. Economists surveyed by MarketWatch are looking for payrolls to drop by 580,000 in the government survey, which would also be the smallest decline since October. The ADP index does not include government jobs. To get an apples-to-apples comparison with the Labor Department report, you have to add in about 8,000 jobs typically gained in the public sector. That suggests total payrolls fell by about 480,000 in April, compared with the MarketWatch consensus of 580,000 for the Labor Department's estimate. The March ADP index was revised to a decline of 708,000 from a decline of 742,000 previously reported.

Employment in the private sector has fallen by 5.27 million since the recession began in December 2007, ADP said. Through March, private-sector employment as measured by the government survey had fallen by 5.30 million. In April, employment in large companies declined by 71,000, employment in medium-sized companies fell by 231,000 and employment in small firms fell by 183,000. ADP provides payroll and human-resources services to about one in every six U.S. workers, serving more than 500,000 companies. The ADP sample is taken during the same week of the month as the government's survey, using similar methods.

Job cuts announced by U.S. employers in April increased 47 percent from a year earlier, led by government agencies and companies in the automotive industry, while the total was the lowest since October. Firing announcements rose to 132,590, compared with 90,015 in April 2008, Chicago-based Challenger, Gray & Christmas Inc. said today. Government employers and auto companies announced the largest cutbacks, accounting for 39 percent of the layoffs. "Job cuts are still at recession levels, but the fact that they are falling is certainly promising and may suggest that employers are starting to feel a little more confident about future business conditions," John A. Challenger, chief executive officer of the placement company, said in a statement. Still, he said, "state and local governments, as well as school districts, are really feeling the impact of this downturn."

The easing pace of layoff announcements adds to evidence that the recession is abating and raises the prospect of a sustained recovery in consumer spending. Federal Reserve Chairman Ben S. Bernanke said yesterday that while job losses and increased unemployment are likely in coming months, economic activity will "bottom out, then turn up later this year." A government report on May 8 may show payrolls fell by 610,000 in April, which would mark a record fifth straight month of losses greater than 600,000, according to the median forecast of economists surveyed by Bloomberg. The jobless rate probably jumped to 8.9 percent, the highest since September 1983.

Already, the economy has lost about 5.1 million jobs since the recession began in December 2007, marking the biggest employment drop in any postwar economic downturn. The number of people on unemployment rolls has broken records for 13 straight weeks, according to the Labor Department, totaling 6.27 million as of the week ended April 18. "The most recent information on the labor market -- the number of new and continuing claims for unemployment insurance through late April -- suggests that we are likely to see further sizable job losses and increased unemployment in coming months," Bernanke said yesterday in testimony to the congressional Joint Economic Committee.

Still, today’s report showed that on a month-to-month basis, the number of planned job cuts fell 12 percent from the 150,411 announced in March. The figures aren’t adjusted for seasonal effects, so economists prefer to focus on year-over- year changes. Job losses will probably continue at automakers and parts suppliers as General Motors Corp. tries to avoid bankruptcy and Chrysler LLC goes through those proceedings. Chrysler has idled most of its factories. Chief Executive Officer Robert Nardelli said April 30 the company may resume production when it emerges from bankruptcy proceedings or sooner if it resolves supply issues.

Cummins Inc., Chrysler’s fifth-largest unsecured creditor, said May 5 it cut production to two days a week at its plant that makes diesel engines for Chrysler’s heavy-duty Dodge Ram pickup truck. The Challenger report on firings does not always correlate with figures on payrolls or first-time jobless claims as reported by the government. Many job cuts are carried out through attrition or early retirement. Some employees whose jobs are eliminated find work elsewhere in their companies, and many announced staff reductions never take place because business improvements. Challenger’s totals also include foreign affiliates.

TrimTabs Investment Research estimated today that the U.S. economy shed 745,000 jobs in April (20,000 more than their March job loss estimates) as wages and salaries plunged an adjusted 5.7% year-over-year. TrimTabs estimated that the economy shed a record 5 million jobs in the past 12 months. "If job losses continue at the present rate, the unemployment rate could top 10% by summer," said TrimTabs CEO Charles Biderman. In a research note, TrimTabs reported that income tax refunds are up 16.5% year-over-year this year, providing a short-term boost to consumption. Unfortunately for the economy, however, the support from refunds is winding down.

Moreover, TrimTabs explained that President Obama’s "Making Work Pay" tax credit is too small to help the economy over the longer term. "The Obama tax credit will distribute $20 billion to consumers from May through July," said Biderman. "This amount is less than one-quarter of the $90 billion the Bush tax credit pumped into consumers’ pocketbooks in the same period last year." Finally, TrimTabs reported that real-time income tax data indicates that the personal savings rate was 1.6% in March, well below the 4.2% estimated by the Bureau of Economic Analysis.

The results of bank stress tests -- expected tomorrow -- will no doubt prompt calls for further government guarantees and capital injections. But continuing to prop up the banks with government cash is a mistake. There is a better approach. A well-capitalized banking sector is a necessary ingredient for effective intermediation and economic recovery. But today's system is not well-capitalized. How can we move in the right direction? In a market economy, the government can create the right incentives by using a combination of carrots and sticks. Thus far, the government has only used carrots with the banks. One major carrot is the Troubled Asset Relief Program (TARP).

The initial infusions were very generous -- the Treasury got back securities worth $78 billion less than the $254 billion it invested -- as the Congressional Oversight Panel pointed out recently. In addition, the FDIC's guarantee of short-term debt was worth $100 billion just for the original nine TARP-participating banks. And the mortgage-related asset guarantees offered to Citibank and Bank of America were worth tens of billions of dollars more. A new round of expensive TARP injections -- by converting the government's preferred stock into equity -- may follow the release of the stress-test results. In addition, the Treasury's Public-Private Investment Program (PPIP) plans to subsidize the purchase of banks' "toxic assets" by hedge funds and other investors. We estimate that the government will spend $2 for every $1 the private sector will put in.

Yet even with this large subsidy, PPIP's chance for success is low because of the substantial gulf between the bid and ask prices on the toxic assets, and the reluctance of investors to partner with the government. Not only is the carrot approach not jump-starting lending, it is also angering the American people. It's hard to justify to taxpayers that we need to reward the same group of people who, rightly or wrongly, are perceived as responsible for the current situation. It's time for government to use the stick, beginning with creditors. The first step should be an announcement that the FDIC guarantees of short-term debt, set to expire at the end of October, will not be renewed. Insolvent banks -- defined not by stress tests, but as those that cannot fund themselves in the private market -- will be taken over by the FDIC.

Of course, this takeover plan must be clear and credible. Otherwise creditors will play "chicken" with the government, knowing that at the last minute the government will flinch and fail to remove the guarantees. Despite the clarity of such an approach, the market might be skeptical for several reasons. First of all, the FDIC lacks the staff to oversee, let alone run, several large and complex banks which may become insolvent. Second, the FDIC's main approach so far, as with Washington Mutual and IndyMac, has been to restructure the banks for acquisition. The trouble with this plan is that it is unclear who will buy the largest banks in the near future. Finally, it is politically unappealing to have a government institution run a significant fraction of our banking sector. Waiving the specter of nationalization, the creditors may try to force the government to bail them out.

We believe these problems can largely be avoided by adopting a simple approach. Rather than taking over and running banks, the FDIC should split each bank into two parts. One part ("the bad bank") will assume all the residential and commercial real-estate loans and securitized mortgages as assets, and all the long-term debt as liabilities. In addition, "the bad bank" will obtain a loan from the "good bank." This loan is necessary because the long-term debt of the old bank is not likely to be sufficient to fund the assets of the bad bank. The good bank will have all the remaining assets, including derivative contracts and its loan to the bad bank. It will have all the insured deposits and the FDIC-guaranteed short-term debt as liabilities. Once the split is accomplished, the good bank can be cut loose from FDIC receivership.

On the one hand, this split separates the toxic assets, whose value is very uncertain, in an institution that has no insured or guaranteed liabilities and poses no systemic risk. The bad bank will be like a closed-end mutual fund and can be run as such. The good bank will be well-capitalized, and the value of its assets will be clear. The losers in this reshuffling are the long-term debtholders who get stuck in the bad bank. For this reason, we propose that they be compensated by receiving all the equity of the good bank. The old shareholders will get the equity in the bad bank. (In any restructuring, bondholders should do better than equity.) And the FDIC minimizes its risk because it guarantees the deposits in the good bank.

In fact, long-term debtholders who have debt claims against the bad bank and equity claims against the good bank will be better off under this plan than if the bank were liquidated or continued to operate as one bank. If the bank were liquidated, bondholders would stand to lose almost all their investment. If the bank continues to operate with government subsidies, the benefit of the subsidies are shared by both debt and equity. Under our plan, the debtholders will get all of the equity in the "good bank" and therefore all the upside of its future performance. One of the major objections to letting banks fail is the argument that they are not really insolvent; they are just facing a temporary dislocation in the marketplace. But if this observation were true, the bad bank would surge in value, and the old shareholders of the banks, who received the shares in the bad bank, would gain. If it is false, the bad bank would default and the old shareholders would receive nothing (as they should).

In order for this plan to work, legislation would need to take effect before the withdrawal of the FDIC guarantee in October, so that FDIC procedures for handling failed banks can be applied to bank-holding companies. FDIC Chairman Sheila Bair has called for such legislation. Most importantly, this plan won't impose any new cost on the taxpayer. Bold stress tests and government intervention reflect President Obama's use of Franklin Delano Roosevelt as a model in dealing with the current crisis. But he got the wrong Roosevelt. He should instead follow the motto of Theodore Roosevelt: Speak softly and carry a big stick.

Regulators have told Bank of America Corp. that the company needs to take steps to address a roughly $34 billion capital shortfall based on results of the government's stress tests, according to people familiar with the situation. The exact amount of the needed infusion couldn't be determined late Tuesday, and Bank of America officials either declined to comment or couldn't be reached. Regulators began notifying the 19 financial companies subjected to the government tests of the results Tuesday. An official announcement is expected after the close of U.S. stock-market trading Thursday. At Bank of America, the government's findings are likely to set off a scramble over how to fill the capital hole at the nation's largest bank in assets.

The Charlotte, N.C., bank already has received $45 billion in capital from the federal government, some of it to help the bank cover losses stemming from its purchase of securities firm Merrill Lynch & Co. in January. The amount of capital now needed by Bank of America could exceed what the bank can raise by selling assets or more shares to the public. As a result, the bank may have no choice but to convert the government's preferred shares into common stock. That would boost the company's capital to the level mandated by regulators but could also leave the U.S. government as one of Bank of America's largest shareholders. In the process, the value of the stock held by existing shareholders likely would be sharply diluted. The company's current stock-market value is about $70 billion.

If the U.S. government ends up with more common stock in Bank of America, it also could test the Obama administration's assertion that banks receiving "exceptional" assistance might face the removal of management or directors. Government officials have always viewed Bank of America's predicament slightly differently than problems at other banks. The bank's troublesome acquisitions of Merrill and mortgage lender Countrywide Financial Corp. likely saved the government from expensive and messy cleanups that could have exacerbated the financial crisis last year. Still, patience with Bank of America Chief Executive Kenneth Lewis has worn thin, at least with many shareholders, following the bank's steep losses and controversy over his handling of the Merrill deal.

Last week, Bank of America shareholders voted to strip Mr. Lewis of his duties as chairman. The company's board has shown no signs publicly that its support for Mr. Lewis is wavering. The large capital hole at Bank of America is the latest sign that government officials are using the stress tests to send a stern message to struggling banks. Bank of America executives objected to preliminary findings of the tests, in which the bank was told that it may need to raise more capital. The final results suggest that the government wasn't willing to budge substantially from its initial results, despite Bank of America's response. It isn't clear what Bank of America did to try to sway regulators from the preliminary findings, or whether executives still are trying to do so.

Bank of America has suggested privately that it views a government stake as its last option, and would pursue that scenario only after its other alternatives are exhausted. The bank already is hunting for a buyer for the First Republic banking unit, acquired as part of the Merrill purchase, and is considering selling asset-management unit Columbia Management. Sales of those two operations could generate about $4 billion, according to David Hendler, an analyst at CreditSights Inc. Bank of America also has said that it could sell additional shares it owns in China Construction Bank to address any capital needs. A lockup provision on roughly a third of its stake in the Chinese bank is set to expire Thursday, and a sale could bring Bank of America roughly $8 billion. Executives have discussed the possibility of a new share offering if Bank of America's stock price climbs higher, according to people familiar with the situation.

Paul Miller, an analyst at Friedman, Billings, Ramsey & Co., estimated in a report Tuesday that Bank of America would need $46.7 billion to achieve a 4% common equity to total assets ratio. The Federal Reserve began briefing the country's 19 largest banks on the results of the stress tests on Tuesday and plans to publish the results Thursday afternoon. The stress tests are a main component in the Obama administration's efforts to shore up confidence in the banking sector and attract private investors back to the banking sector. The tests looked at the ability of each bank to withstand a worsening economic slump through next year, factoring in heavy loss rates in areas such as credit cards and commercial real-estate loans. Roughly 10 of the 19 banks, including Bank of America, are expected to need more capital, according to people familiar with the matter. As recently as March and April, Mr. Lewis insisted that Bank of America didn't need any more capital. But when asked the question at last week's annual meeting, he was more circumspect. "We think we're fine, but it's now out of our hands," Mr. Lewis said.

Wells Fargo & Co., the fourth-largest U.S. bank by assets, requires about $15 billion in new capital as a result of regulators’ stress test on the lender, according to a person familiar with the matter. Regulators have said options open to lenders include converting existing government preferred shares; Wells Fargo got $25 billion in taxpayer funds last year. As part of the stress tests on the 19 largest banks, officials are assessing whether banks have enough common equity, among other capital measures. Wells Fargo’s assessment compares with the $34 billion gap at Bank of America Corp. identified by people familiar with the matter late yesterday. JPMorgan Chase & Co. doesn’t need to raise its capital, people with knowledge of its results said, while Goldman Sachs Group Inc. and Bank of New York Mellon Corp. have taken actions that suggest they also passed their reviews.

The Federal Reserve is scheduled to publish the stress tests results tomorrow. Wells Fargo spokeswoman Julia Tunis Bernard declined to comment. The bank’s stock pared gains after the news, and was up $2.03, or 8.7 percent, as of 11:52 a.m. on the New York Stock Exchange. The shares have dropped about 14 percent so far this year. Chief Executive Officer John Stumpf said last week that Wells Fargo will pay back $25 billion to the Treasury’s Troubled Asset Relief Program and restore its dividend as soon as possible. "We earn our way out," Stumpf, said at the company’s annual shareholders’ meeting in San Francisco April 28. "This company has a great capacity to produce wonderful results. That will be the driving force." The stress tests were designed to incorporate potential earnings in their assessments of banks’ capital needs.

The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Fed’s announcement tomorrow. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, people familiar with the matter said. Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter. The Treasury will unveil conditions for repaying TARP cash as soon as today, they said. JPMorgan, Goldman Sachs and Bank of New York Mellon have each sold debt without FDIC guarantees in the past month. Bank of New York Mellon said proceeds from its May 5 sale will be used to help repay the $3 billion capital injection it got from the TARP last year.

People familiar with the matter said May 4 that about 10 of the 19 firms will be deemed to need additional capital. The number increased from six to eight a week ago, after regulators boosted their target for the reserves the firms must hold. Officials favor tangible common equity equal to about 4 percent of a bank’s assets, up from an earlier target of 3 percent, two people with knowledge of the deliberations said last week. By exchanging preferred for common, banks would be able to Increase their TCE, a measure of how much capital a firm has to withstand losses. The financial yardstick strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the U.S. Treasury. Bank of America’s capital shortfall is the biggest among the 19 banks, people familiar with the matter said yesterday. Spokesman Scott Silvestri in Charlotte, North Carolina, declined to comment. Analysts’ estimates of the company’s shortage of common equity have ranged from zero to as much as $100 billion.

Chief Executive Officer Kenneth D. Lewis declined to discuss the stress tests at Bank of America’s annual meeting last week. He said April 20, responding to an analyst’s question, the company didn’t expect to require more capital. Lewis, 62, was ousted as chairman on April 29 after shareholders rebelled against management’s handling of the Merrill Lynch & Co. takeover. Bank of America is considering selling part of its stake in China Construction Bank Corp. immediately instead of in a few weeks time, the Financial Times reported today. While Citigroup has received the biggest rescue so far among commercial banks, it has taken steps in recent weeks to bolster its capital. The New York-based company plans to get a $2.5 billion boost to tangible common equity, or TCE, from selling brokerage and investment banking units in Japan. It’s also pushing to complete a venture with Morgan Stanley ahead of schedule to lock in a $5.8 billion gain, people familiar with the matter said.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the New York-based firm’s $25 billion in taxpayer funds "tomorrow" and referred to the money as "a scarlet letter." Repayment would free the company from compensation restrictions and other oversight. Wells Fargo said last month that first-quarter profit jumped 53 percent from a year earlier as borrowers rushed to refinance mortgages amid record-low interest rates. It slashed its quarterly dividend 85 percent in March to save $5 billion. Chairman Richard Kovacevich in March called the administration’s stress-testing program "asinine" and Berkshire Hathaway Inc. Chairman Warren Buffett, whose company is Wells Fargo’s biggest shareholder, said May 3 that Wells Fargo didn’t need any more capital. The bank’s shares have dropped since it acquired Wachovia Corp. in December. Investors have been concerned that losses in Wachovia’s $482 billion loan book, which includes $118 billion of option adjustable-rate mortgages, will hurt Wells Fargo’s balance sheet and erode capital.

In accordance with accounting rules, Wells Fargo took initial writedowns on $37.2 billion of Wachovia’s troubled loans. The Treasury and regulators have presented different options for the banks to shore up their books without taking taxpayer money, including selling assets, seeking private capital and converting previous government investments from preferred to common shares. Not including repayments, the Treasury has about $110 billion left in the $700 billion TARP. For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations, the government won’t be a "hands-off" investor and will take steps to ensure that management is "effective," Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday. "It’s obviously not our intention or desire to have long- term government ownership of banks," Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a "few years" before banks can end their dependence on government capital.

Banks that want to exit from the U.S. government’s capital injections must demonstrate they can issue debt to private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter. The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so. The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.

Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust. "My hope is this helps with clarity on who are the winners and who are the losers," said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million. Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.

FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy. The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.

"We still have some capacity under the FDIC-guaranteed at pretty attractive spreads," said David Viniar, the company’s chief financial officer, in an April 14 conference call with investors. "We’ll continue to use that when it’s available, but we expect to continue to raise unguaranteed debt when it’s available as well." For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations at the firms, the government won’t be a "hands-off" investor and will take steps to ensure that management is "effective," Fed Chairman Ben S. Bernanke told lawmakers today.

"It’s obviously not our intention or desire to have long- term government ownership of banks," Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a "few years" before banks can end their dependence on government capital. Officials’ "top priority" will be working with the banks to get them on a path toward repaying the taxpayer, including sales of assets or raising private capital, the Fed chief said. The Obama administration has yet to detail how it intends to implement executive compensation guidelines enacted by Congress, another restriction faced by banks that keep taxpayer funds. The rules limit incentive pay for top executives at banks receiving at least $500 million in rescue funds from the Treasury.

White House press secretary Robert Gibbs suggested the Obama administration may seek management changes at U.S. banks after federal regulators release results of "stress tests." "The government has, in each of the current and past administrations, weighed in on changes at the CEO level and at the board of directors level" at auto companies and financial institutions needing federal aid, Gibbs said in response to a question at the daily White House briefing. That was done to "ensure that going forward they felt that the management was in place to remedy the situation and ensure long-term viability without continued government assistance," he said.

The stress tests of the 19 largest U.S. banks by the Federal Reserve and regulators are intended to determine whether the banks have enough capital to absorb losses in case the recession gets worse. The results are scheduled to be made public tomorrow. Once the assessments are released, "there will be a period of time to put together a plan," Gibbs said. "We’ll have to wait and see what these individual tests bring." The administration asked General Motors Corp. Chief Executive Officer Rick Wagoner to step down on March 27 and said it wants a majority of board members replaced after determining GM’s recovery plan was insufficient. The company got $15.4 billion in government loans to keep it afloat. Under the administration of former President George W. Bush, the chief executives of American International Group Inc. and Fannie Mae and Freddie Mac were ousted after the government took control.

Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and GMAC LLC are among the companies judged to need additional capital, according to results of the stress tests, people familiar with the matter said. Bank of America has the biggest shortfall, at $34 billion, according to people familiar with the matter. Citigroup’s requirement for deeper reserves to offset potential losses over the coming two years is about $5 billion, people with knowledge of that bank’s results said. Wells Fargo requires about $15 billion, while GMAC’s need is $11.5 billion, one person said. Goldman Sachs Group Inc., Morgan Stanley, MetLife Inc., JPMorgan Chase & Co., Bank of New York Mellon Corp. and American Express Co. were deemed not to need additional funds, the results show.

The results of government stress tests on the 19 largest US banks are due to be announced on Thursday, measuring how viable they are under adverse economic conditions. While all the banks appear to have passed the tests, reports suggest as many as 10 need to raise additional capital. Given that the economic environment already reflects the tests’ worst-case scenario, and that recent estimates by the International Monetary Fund of financial sector losses have doubled in the past six months, the stress test results will not be credibly interpreted as a sign of bank health. Instead, market participants will conclude that those that require additional capital have, in fact, failed. As a result, these institutions will not be able to raise outside capital and will immediately require government help. Once again, the question will be how the near-insolvent banks can be kept afloat, to avoid systemic risk.

But the question we really should be asking is: Why keep insolvent banks afloat? We believe there is no convincing answer; we should instead find ways to manage the systemic risk of bank failures. The economist Joseph Schumpeter famously argued that the essence of capitalism was the process of creative destruction by which new economic structures are born from the rubble of older ones. Schumpeter’s biggest fear, however, was that capitalism would collapse from within because society wouldn’t be able to handle the chaos. Schumpeter was right to be afraid. The response of governments worldwide to the financial crisis has been to give the structure of private profit-taking an ever-growing scaffolding of socialised risk. Trillions of dollars have been thrown at the system, just so that we can avoid the natural process of creative destruction which would take down these institutions’ creditors. Why shouldn’t the creditors bear the losses? One possible reason is the "Lehman factor", the bank runs that would occur as a result of a big failure. But we have learnt from the Lehman collapse, and know not to leave the sector high and dry when a systemic institution fails.

Just being transparent about which banks clearly passed the stress tests would alleviate many of the fears. Another reason is counterparty risk, the fear of being on the other side of a transaction with a failed bank. But, unlike with Lehman, the government can stand behind any counterparty transaction. This will become easier if a new insolvency regime for systemically important financial institutions is passed on a fast-track basis by Congress. Problem nearly solved. That leaves the creditors – depositors, short-term and long-term debt-holders and preferred shareholders. For the large complex banks, about half are depositors. To avoid runs on the uninsured portion of these deposits, the government has to provide a backstop. But it is not clear it needs to cover other creditors of a bank, as recent failures of IndyMac and Washington Mutual attest.

Even if systemic risk were still present, the government should protect the debt (up to some level) only of the solvent banks, not the insolvent ones. This way, the risk of the insolvent institutions would be transferred back from the public to the private sector, from the taxpayer to the creditors. The government may be able to avoid the mess by persuading long-term creditors to swap their debt for equity, at a loss. The recent failed effort with Chrysler suggests this will not be easy. But a credible threat of bankruptcy could scare creditors into negotiation, to avoid bigger losses. Suppose the systemic risk problem is solved. The other argument against allowing banks to fail is that after a big loss by creditors, no one would be willing to lend to banks – which would devastate credit markets.

However, the creative-destructive, Schumpeterian, nature of capitalism would solve this problem. Once unsecured debtholders of insolvent banks lose, market discipline would return to the whole sector. This discipline would force the remaining banks to change their behaviour, probably leading to their breaking themselves up. The reform of systemic risk in the financial system would be mostly organic, not requiring the heavy hand of government. Why did creditors not prevent the banks taking excessive risks before the crisis hit? For the very same reason creditors are getting a free pass now: they expected to be bailed out. For capitalism to move forward, it is time for a little orderly creative destruction.

Treasury Secretary Timothy Geithner said none of the 19 banks that underwent government stress tests are insolvent and the results will reassure investors and the public that the U.S. financial system is sound. While some banks will need to raise more capital, there are a number of ways they can do that and most should be able to do it in the private sector, Geithner said today in an interview with Charlie Rose scheduled to air in full tonight on PBS. "I think the results will be, on balance, reassuring," Geithner said. "None of those 19 banks are at risk for insolvency." U.S. banks may outline their strategies for adding capital after the Federal Reserve publishes the stress-test results tomorrow. The Treasury secretary did not say how many of the 19 will need additional capital.

Geithner said those that do require more funds can raise new common equity from existing shareholders or new investors, convert preferred shares held by private investors or the government into common equity, sell additional assets or, failing that, they can apply to get additional capital from the government. Bank of America Corp. may need $34 billion, the largest requirement among the biggest banks subjected to the tests, said a person with knowledge of the matter. Citigroup Inc., Wells Fargo & Co. and GMAC LLC are also among the companies judged to need more capital. Geithner, speaking in Washington, said he expects the "vast bulk" of banks will be able to raise needed capital "through private sources" instead of getting government financing.

"There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward," Geithner said. "What we want to do is make sure that people have confidence that our financial system is going to be able to get through this and going to be able to lend." The government will take larger stakes in the banks, either by adding capital or converting preferred shares, "if necessary," Geithner said, "but we’ll be reluctant to do that" and "we’ll get out as quickly as possible." He did not rule out forcing management changes at banks in which the government has a sizeable holding. "We’ll have to make judgments about whether the quality of leadership of those boards is strong enough so that again our interests are met best," Geithner said. "And our interests are not just as a shareholder, as an investor. We want to make sure the institutions will be strong enough so that we can get out, the private capital will come replace us over time."

Geithner said he’d welcome banks that want to repay money the government provided through the $700 billion Troubled Asset Relief Program, adding that he expects more than $25 billion will be repaid in the next six to 12 months. "I think we’ll get significantly more than that back," Geithner said. "So we have a substantial amount of resources to backstop the system." Several banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co. have said they want to repay TARP funds immediately. If the stress test shows they have enough capital they will be allowed to do that, Geithner said, provided they can borrow in the market without using a Federal Deposit Insurance Corp. guarantee. Release of the stress tests will help the Treasury’s Public-Private Investment Program, designed to help remove bad assets from bank balance sheets by offering government loans to investors willing to purchase them, Geithner said.

Because banks will want to raise capital, "they’ll have strong incentive" to sell those assets at reasonable prices, Geithner said. The PPIP should be "up and running in the next four to six weeks." The biggest U.S. banks went through stress tests to see how they’d weather a broader downturn in a recession that started in December 2007. The economy shrank at a 6.1 percent annual pace in the first three months of the year, after contracting 6.3 percent in the fourth quarter of 2008. About 5.1 million jobs have been lost since the recession began in December 2007, marking the biggest employment drop in any postwar economic slump. Geithner said he sees "important signs of some stability" returning to the economy.

Earlier today, a private report showed companies in the U.S. cut an estimated 491,000 workers from payrolls in April, indicating the worst of the recession’s job losses may have passed. The drop in the ADP Employer Services gauge was smaller than economists forecast and the fewest since October. "Things feel a little better; people sense a bit more stability and you can see it in behavior," Geithner said, noting "sustained, day-by-day, week-by-week improvement in consumer and business confidence now for several weeks." Geithner tempered his optimism by saying there’s "a lot of pain across this country" and still "enormous uncertainty." The nation’s unemployment rate, which reached a 25-year high of 8.5 percent in March, may still rise as the economy recovers.

"It’s not going to feel dramatically better for a while." Geithner called the Fed’s outlook for "slightly positive" growth in the second half of this year and an expansion that will "strengthen" next year a "good, independent, credible forecast." "The pace of decline is slowing, here and around the world," Geithner said. "The main thing is a sense of stability." Geithner said the economy doesn’t need another stimulus package "at this stage, but that’s something we’ve got to keep an eye on carefully." Governments have made mistakes in the past by removing extraordinary aid to growth before recovery fully takes hold, he said.

On average, world trade fell 31 percent in January 2009. To varying degrees, recession and depression gripped globally. "The outlook for global consumption remains bleak. Exports are likely to remain lackluster until global consumers regain their appetite for consumption," wrote Jing Ulrich, managing director at JPMorgan in Hong Kong, in response to the dire data. To track and make practical use of trends requires critical analysis of not only the data but also of the interpretations arising from the data. This becomes particularly essential when interpretations express a virtual media consensus. "Whenever you find that you are on the side of the majority, it is time to pause and reflect," advised Mark Twain.

A case in point: On the surface, Ms. Ulrich's assessment above does not seem unreasonable. It is a theme expressed, with minor variations, by a majority of economic analysts reported by the media. But that assessment rests upon a set of false or questionable assumptions. The first assumption was that all consumers need to do is "regain their appetites" for exports. But it has nothing to do with "appetites." Consumers were broke. They were no less hungry for products - they just didn't have the money to buy them. The second assumption was that once consumers started consuming again exports would regain luster. Implicit in this statement was that as exports grew, economies would rebound and everything would go back to normal. This "normal" refrain was endlessly repeated, not only by economic analysts, but by politicians and business leaders.

Unquestioned was not only the inevitability, but also the virtue and desirability of a return to "normal." What was normal? Normal, prior to "The Greatest Depression," meant unchecked over consumption and over development made possible by the availability of cheap money and easy credit. On the consumer end, "normal" was a death wish, "shop 'til you drop" - an obsessive compulsion by the profligate many to spend money they didn't have but had to borrow. The spending spree extended to buying expensive new cars rather than affordable used ones. It had people building extensions and making home improvements when neither were necessary. It meant buying a McMansion when a Cape Cod would do. Splurging on expensive vacations, elaborate weddings and extravagant bar-mitzvahs to impress family and friends.

Borrowed money financed a major lifestyle upgrade that otherwise could not have ever been imagined, but that corresponded to what most people considered the "American Dream." Borrow to the limit now, and pay sooner or later was "normal." On the commercial/financial end, "normal" was also the obsessive compulsion to endlessly acquire, not merely upgrade. Borrowed billions, lots of leverage and little collateral provided financiers and developers with the power to acquire ever more money, assets and prestige - through mergers and acquisitions, building developments, equity market speculation and predatory business practices that gobbled up or drove out the competition.

Give or take a bit of regulation and self-restraint, this was the "normal" the popular new President promised to return to. Which brings us to the third assumption, and arguably the most important which was that the crisis - inability of banks to lend and businesses to borrow - was mainly responsible for the economic disaster. As President Obama put it, "Our goal is to quicken the day when we restart lending to the American people and American business, and end this crisis once and for all." He said, "You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll."

Sounds positive, doesn't it? Ease the "flow of credit." Make it easier "to get a loan." But what the President meant and did not say was ... take on more debt, borrow more money. Sound familiar? Turn back the clock. Remember the advertisements at the start of the decade encouraging Americans to take out home equity loans, to buy new cars, to move up from a starter home into the dream house? With interest rates at 46 year lows and credit flowing, the public were suckered into betting on their futures with borrowed money they could only pay back as long as they had jobs, could make payments and the economy didn't collapse.

But when they lost their jobs, they couldn't make payments and the economy began to collapse. Total unemployment (including discouraged workers and those with part time jobs looking for full time) was nearing 15 percent. In the fourth quarter of 2008, the net worth of American households fell by the largest amount in more than a half- century of record keeping. By February 2009, the foreclosure rate was up 30 percent from February 2008. What Mr. Obama promised as the solution was, and had been, the problem. The country was already overwhelmed with debt ... debt that it couldn't pay back. In what way could incurring more debt "end this crisis once and for all"?

It was a plain fact; the flow of easy credit produced a torrent of debt. In 2009, private sector credit market debt was 174 percent of GDP. Household debt-service ratio was at an all-time high. US households had 39 percent more debt than income. (In 1962, consumers had 37 percent less debt than income. To promote policies encouraging people to take out more loans and sink still deeper into debt was abnormal, not "normal." The abnormal had been renamed the normal. Instead of encouraging people to live within their means, cut back, save money, and distinguish between "wants" and real needs, the official policy was to turn on the credit tap and flood the world with more debt.

The sanity of the policy was never in question. Arguments raged only over the quickest and most effective way to turn on the money spigot. Everyone was looking for someone, somewhere, for rescue, and most eyes were turned to the United States. Even though the US was blamed for the flagrant economic abuses that brought on the crisis, given its economic clout and Superpower status, America was still looked to for the leadership needed to pave the way to recovery. With its globally popular new president, hopes ran high that American know-how would know how to fix the problem ... as though it were an intellectual exercise that could be solved by applying the correct economic formula.

No such formula existed. Yet so desperate was the world that it placed its hopes on the very people responsible for the deregulation of the financial industry largely blamed for the crisis. The deregulators now occupied key positions within the cabinet of that globally popular new President. Billionaire investor Warren Buffett added a military dimension, dubbing the meltdown an "economic Pearl Harbor." Buffett called on Congress to unite behind President Barack Obama, comparing the economic crisis to a military conflict that needed a commander-in-chief. "Patriotic Americans will realize this is a war," he said.

If it was an economic Pearl Harbor, the enemies were Fannie Mae, Freddie Mac, A.I.G., Countrywide, Bank of America, Merrill Lynch, Citigroup, Bear Stearns, and all the other banks, brokerages, speculators, insurance companies, hedge funds and leverage buyout specialists that had launched the sneak attack on the American economy. It had nothing to do with patriotism, unless being a "Patriotic American" meant appeasing and rewarding the enemy with trillions of dollars of taxpayer money and not being allowed to know where the money went.

Fed Refuses to Release Bank Data, Insists on Secrecy

March 5, 2009 (Bloomberg) - The Federal Reserve Board of Governors receives daily reports on bailout loans to financial institutions and won't make the information public, the central bank said in a reply in a Bloomberg News lawsuit. The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast "a stigma on recipients of more than $1.9 trillion of emergency credit from US taxpayers and the assets the central bank is accepting as collateral.

The public had been cozened into believing:

That disclosing the identities of the recipients would poorly reflect upon their public image and therefore their ability to function. Secrecy, on the other hand, allowed them to continue making disastrous decisions, while bamboozling clients who would not know they were dealing with incompetents - who stayed in business only because of huge taxpayer-financed infusions of corporate welfare. The "too big to fail" had to be bailed out by taxpayers in order to keep "the credit markets from seizing up." But the consequences of seized up credit were rarely if ever spelled out.

Many financial analysts no less "expert" than those pushing through the bailouts were convinced that allowing the credit markets to seize up would, in the long run, prove far less costly than endlessly printing money and pouring it down a plush-lined sink hole. Buffett was wrong. It wasn't a "war" at all. It was a criminal case, or should have been, but the accused took a financial Fifth Amendment - the right to remain silent, since any statement made could be used as evidence against them - and got away with it. When, at a hearing before the Senate Budget Committee, Fed Chairman Ben Bernanke was asked, "Will you tell the American people to whom you lent $2.2 trillion of their dollars?" He answered, "No."

General Motors Corp. will probably report its eighth straight quarterly loss tomorrow, reinforcing its push to get the union, U.S. government and bondholders to cut $44 billion in debt.The Detroit automaker may lose $11.34 a share, equal to about $6.9 billion, compared with a net loss of $5.74, or $3.3 billion, for the same quarter a year ago, according to the estimates of five analysts surveyed by Bloomberg. "It actually helps their cause to report a big loss, to show how close they are to actually being bankrupt," said Kevin Tynan, an analyst at Argus Research in New York. He has a sell rating on GM stock. GM Chief Executive Officer Fritz Henderson has said he is still trying to avoid taking the 100-year-old automaker into bankruptcy protection on even though he said it’s more probable now because of the Obama administration’s insistence that debt holders and others take deeper cuts by a June 1 deadline than originally planned.

GM has already lost $82 billion since 2004, its last profitable year. Excluding some costs, GM may report a loss of $10.97 a share, according to 11 analysts surveyed by Bloomberg. Most analysts use the so-called adjusted results to measure performance. The automaker announced April 23 as much as 9 weeks of downtime at 14 North American plants between now and mid-July to adjust production to a general decline in demand. Since then, the automaker has added back a week of production at a Texas sport-utility vehicle plant, two weeks at a Michigan truck plant, and today said it canceled a scheduled vacation week at its Oshawa, Ontario, car plant because of strong demand for the new Chevrolet Camaro. "They’re in such a precarious situation, a strong earnings report might not stave off bankruptcy," said analyst Stephanie Brinley, of AutoPacific in Troy, Michigan. "Their problems are systemic. One quarter’s performance isn’t going to fix the fact that they’re running out of cash."

President Barack Obama in March rejected GM’s original plan to eliminate 47,000 jobs this year and cut about $28.5 billion in union and bond debt, because he said it wasn’t sufficient to return the automaker to viability and gave executives 60 days to restructure out of court. GM agreed to kill the Pontiac brand, added two more plant closings and said at least 7,000 more union jobs will be eliminated by the end of next year than planned. As part of the new orders, the Obama administration asked Rick Wagoner to step down as CEO and chairman and appointed GM director Kent Kresa as chairman and Henderson as CEO. Kresa is in the process of replacing a majority of GM’s board at the direction of Obama’s auto task force. Under GM’s latest proposal, the U.S. would control at least 50 percent of 60 billion shares in the restructured GM and a union-run health-care fund would get 39 percent. Unsecured bondholders would get 10 percent and existing shareholders would get 1 percent, GM said. After the exchange was complete, the company would do a 1-for-100 reverse split of the shares.

If 90 percent of the bondholders don’t sign up for the GM offer of 225 shares in the new automaker for each $1,000 in principal they hold by May 26, GM plans to file bankruptcy, Henderson said after unveiling the offer. Bondholders countered the government offer with a proposal that GM give them 58 percent of the equity in the reorganized company. Henderson told reporters yesterday that the U.S. Treasury has indicated it "would not be supportive of shareholding in excess of 10 percent" for the bondholders. "It’s at a point where you would think they would want to show the financials as bad as they are and put the screws to the bondholders," Tynan said. A New York bankruptcy judge’s decision late yesterday to allow Chrysler LLC to go forward with a plan to sell its best assets to a new company and leave the bad assets behind increases the likelihood GM will seek court protection if enough bondholders don’t agree to an equity swap, Brian Johnson, a Barclays Plc analyst based in Chicago, said in a report today. He has a neutral rating on the shares. "The ruling likely means that ‘New Chrysler’ can emerge in 60 days, making a similar ‘quick rinse’ for GM bondholders appear more likely, in our view," Johnson wrote.

There's creative destruction -- economist Joseph Schumpeter's term for the normal churnings of capitalism -- and then there's destructive destruction. Anyone interested in the latter should pay close attention to the arguments being made in federal bankruptcy court by attorneys for the hedge funds that held out for more in the Chrysler bankruptcy deal. Thomas Lauria, who represents those funds, argued Monday that the court should block the federal bridge loan that will keep Chrysler afloat during the bankruptcy proceedings. As Judge Arthur Gonzalez noted in denying Lauria's request, blocking the loan would force Chrysler (and, he could have added, many of its suppliers and dealers) to liquidate -- throwing tens (perhaps hundreds) of thousands of Americans out of work during the most serious recession since the 1930s and terminating medical benefits to tens of thousands of Chrysler retirees.

Liquidation would also compel the American public to write off the loans the government has made to the company, rather than become shareholders in the slimmed-down Chrysler, as the Treasury's plan suggests. But the public, the retirees, the dealers, the suppliers and the workers be damned. Liquidation is what the hedge funds want, on the theory that they could realize more than what the Treasury's plan offered them, from the sale of -- well, it's not clear what they think Chrysler can sell off at a decent price. Old auto factories in Michigan and Indiana? Who would buy them? To what end?

If the hedge funds are standing on principle, it's the principle that holders of secured debt should always have first claim to a bankrupt company's assets. But if they thought the administration would honor their claims above those of the public and other Chrysler stakeholders, they didn't do their due diligence about the Treasury officials who are in charge of restructuring the auto industry. In particular, they missed a 2006 speech delivered to a group of investors by Ron Bloom, the onetime investment banker who left Wall Street for the Steelworkers union, which he represented in scores of steel company restructurings, and whom President Obama tapped, along with Steve Rattner, to head up the administration's auto task force.

The banks and bondholders that lend companies money, Bloom said, constantly track the value of the bonds they hold, which enables "those who like the risk-reward ratio to take it and those who don't to liquidate their position and move on." Compare that, Bloom went on, to the position of retirees who deferred wage claims so that they could have a pension and medical benefits in retirement. If the company can't honor those claims, the retiree, unlike the bondholder, can't "take the company's promise, convert it to its present value and sell it to someone who would like to own it."

The Treasury's plan for Chrysler, and its proposed plan for General Motors, gives those retirees stock in the company -- the only way to keep afloat their otherwise unredeemable investment in Chrysler (that is, their medical benefits). It gives the public a stake in the company in return for its loans. It scraps the old management and board of directors, and downsizes the company to a point where the government believes it can become profitable again. It requires that 40 percent of Chrysler's production be performed in the United States -- a perfectly sensible, if groundbreaking, condition from a government that is committed to preserving and boosting domestic manufacturing.

In other words, the Treasury's approach to the auto industry is equitable, responsible to taxpayers and economically sensible. It is also, in almost every particular, the diametric opposite of its approach to the banks. In return for its major loans to floundering auto companies too big and strategic to be allowed to go under, the Treasury opted for a structured bankruptcy, converting its loans to shares, ousting top executives, shrinking the companies. In return for its mega-loans to floundering banks that were also too big and strategic to fail, the Treasury has not opted for structured bankruptcy, has not converted its loans into shares, has not forced out top executives, has not moved to make banks smaller (save in its proposal to limit leverage). Indeed, its bailout of AIG rewarded bondholders such as Goldman Sachs to the detriment of everyone else.

Why the difference? Why compel the restructuring of one crucial industry and leave another, whose mismanagement all but brought down the world economy, basically untouched? Could it be that the leaders and folkways of American banking are familiar to the men who run the Treasury, while the leaders and folkways of the American auto industry are not -- meaning that they can assess Detroit more dispassionately than they can Wall Street? In short, where is the Treasury's Ron Bloom for banking?

You can call the plan to merge Chrysler and Fiat good for the economy. You can think it creative. You can say it’s the start of "a vibrant new company," as Chrysler LLC Chairman Robert Nardelli did last week. But there’s one word that you can’t call the Chrysler bankruptcy package: legal. The plan would overturn basic rules of bankruptcy by setting up a sort-of sale to sidestep pesky legal requirements. It would bulldoze well-established rights of secured creditors, property rights the U.S. Constitution guarantees. So if U.S. Bankruptcy Judge Arthur Gonzalez follows the law, the Chrysler rescue plan dies. If he blinks and approves it, secured creditors everywhere should feel a shiver of unease, and quick sales of insolvent companies to avoid court scrutiny would multiply. The other option is a settlement, and that might well be where this is headed.

I hate to say it, but the dissident Chrysler lenders are right, the ones President Barack Obama described as greedy hedge funds selfishly blocking Chrysler’s survival. The president’s fist-waving looks a lot like the posturing lawyers use to scare an adversary into surrender, never mind the law. In fact, several are giving up the cause. At the heart of the plan, and at the heart of the plan’s problem, is the idea that Chrysler would sell itself quickly rather than go through months or years of court-supervised reorganization. Called a 363 sale for the relevant section of the bankruptcy code, it can close within 60 days and unload all or part of the company. The sale to Barclays of a piece of Lehman Brothers Holdings Inc. took about a day. A 363 sale is perfectly legal when a sound business reason demands it and when it isn’t reorganization in disguise.

But if it’s aimed at resolving creditors’ claims, that is what reorganization is for. Bankruptcy reorganization promises secured creditors at least the same payout they would get if the company liquidated, and Chrysler’s proposed sale looks like a way around that. Figuring what creditors have coming to them requires lots of paperwork and hearings. That’s why it takes so long. And that is what Chrysler is trying to avoid. In fact, it must avoid a long, drawn-out bankruptcy if it is to survive. But with a 363 sale, there is no chance to figure the value of Chrysler’s assets if sold piecemeal, much less what each creditor should get. The secured creditors who are complaining about this helped save Chrysler the last time it almost went under, in 2007 after the marriage to Daimler AG soured. How much of a haircut should they be forced to take?

The dissidents say the sale is nothing more than what bankruptcy law calls a sub rosa reorganization, a secret reordering dressed up to look like a sale, which the law forbids. Plus, would it even be a true sale? In public statements Chrysler says a United Auto Workers health benefits trust would get 55 percent of the shares of New Chrysler and a $4.6 billion note to satisfy some of the group’s unsecured claims against the company. Paying nothing but offering its fuel-efficiency expertise, Fiat SpA would own 20 percent initially and could increase its stake by another 15 percent. The U.S. and Canadian governments, which are providing billions in interim financing, would own the rest.

Chrysler is essentially selling itself to itself, says Lynn LoPucki, a law professor at the University of California, Los Angeles. He teaches secured transactions and maintains a database of major bankruptcies. So, if the "sale" isn’t a true sale, and if it dictates payout to secured creditors, isn’t that a sub rosa reorganization? If it favors junior creditors over senior creditors, doesn’t it violate the very basics of bankruptcy law? Senior creditors can volunteer to give up some of what’s due them but they can’t be forced to by a bankruptcy court. "Those are property rights, and they are protected by the Constitution," says Daniel Glosband, a partner in Boston’s Goodwin Procter. "You can’t just take them away." And yet, it could happen. "There’s an enormous momentum in favor of the government plan," says Jay Westbrook, who teaches bankruptcy law at the University of Texas.

It’s naïve to assume bankruptcy judges feel compelled to follow the law, says LoPucki. He argues that bankruptcy courts across the country compete for the big cases by giving lawyers for major companies what they want. "According to the law, this plan should not be approved," LoPucki says. Yet he predicts Gonzalez will do it anyway to persuade other companies (General Motors Corp. comes to mind) to pick Manhattan’s bankruptcy court over, say Detroit’s. Already the Chrysler case is one for the books. You have the federal government sending a company into bankruptcy court, financing its reorganization, deciding who will get what, setting a strict timetable and urging a judge to blink at the law. If the argument that Chrysler’s welfare is so critical to the national interest that longstanding laws can be ignored, what’s next? Some future president will find a way to justify blatantly illegal conduct. Such as torture.

The 2008 AIG bonus pool just keeps getting larger and larger. In a response to detailed questions from Rep. Elijah Cummings (D-Md.), the company has offered a third assessment of exactly how much it paid out in bonuses last year. And the new number, offered in a document submitted to Cummings on May 1, is the highest figure the company has disclosed to date. AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008. That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees.

The figure Ashooh offered was, in turn, substantially higher than company CEO Edward Liddy claimed days earlier in testimony before a House Financial Services Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: "I think it might have been in the range of $9 million." "I was shocked to see that the number has nearly quadrupled this time," said Cummings. "I simply cannot fathom why this company continues to erode the trust of the public and the U.S. Congress, rather than being forthcoming about these issues from the start." AIG spokesman Ashooh said the company’s revised accounting is the result of different wording of the questions asked by Cummings and POLITICO.

The new figure of $454 million, Ashooh said, "reflects all types of variable compensation across all of our businesses," while the $120 million figure he provided earlier reflected only bonuses paid to corporate headquarters executives and high-ranking officers at its major businesses around the world. Ashooh said the $454 million figure includes the $120 million he had previously disclosed. All of the numbers provided are on top of the controversial $165 million in retention bonuses offered to employees of a division of the company known as AIG Financial Products. It was the disclosure of those payments that set off a political firestorm earlier this year. Washington was stunned that employees of the very unit that had brought AIG to its financial knees were being so richly rewarded — especially after the company received $170 billion in taxpayer bailout money.

The controversial payments were described by the company as "retention agreements" paid to keep employees from leaving. But the disclosure of the bonus payments to one division of the company prompted confusion about how big the companywide bonus pool was for 2008. That’s the question that has prompted three different answers from AIG officials. AIG’s Ashooh says the account AIG is now offering includes a larger group of employees than had been counted to tabulate the earlier disclosures. "I think we’ve been pretty forthcoming," Ashooh said. "AIG is not a simple organization. We’re answering the question that we think we’re being asked."

The questions from POLITICO and from Cummings were both submitted in writing. On March 19th, POLITICO asked AIG in an e-mail, "What was AIG’s total bonus pool (outside the retention agreements) for 2008?" To that, after some back and forth, AIG offered the $120 million figure. Later in March, Congressman Cummings submitted written questions to AIG, asking: "Please specify the exact amount in bonuses — not retention payments or any other form of compensation — paid by AIG to employees of any division of AIG in 2008 or paid in 2009 for work performed in 2008." To that question, AIG disclosed a division by division breakdown of payments totaling $454 million. The company said it maintains "approximately 374" plans that pay variable amounts of compensation based on performance. Citing the large number of recipients and concerns over the safety of AIG employees, the company declined to provide a list of the names of bonus recipients.

It broke down its results by division, including:

Domestic Life and Foreign Life Operations: 23,851 employees received an average of $5,050 each.

Foreign General Insurance Operations: 8,669 employees received an average of $5,074 each.

Retirement Services Operations: 1,168 employees received an average of $11,889 each.

Financial Services: 5,357 employees received an average of $4,994 each.

Asset Management Group: 2,095 employees received an average of $51,026 each.

Corporate wide variable plan: 6,410 employees received an average of $18,954 each.

The company also disclosed that it is developing a new bonus plan for 2009 in consultation with the Federal Reserve and Treasury.

The U.S. financial system should rely on smaller and less complex firms over the interconnected behemoths that helped cause the current economic strife, a top U.S. banking regulator said Wednesday. Federal Deposit Insurance Corp. Chairman Sheila Bair, in remarks before a U.S. Senate committee, said a financial system made up of a "handful of giant institutions with global reach" and a single regulator is a recipe for mistakes. "A strong case can be made for creating incentives that reduce the size and complexity of financial institutions as being bigger is not necessarily better," Ms. Bair said in testimony for the Senate Banking Committee.

Ms. Bair, who as protector of the nation's deposits has been at the fore of government efforts to deal with the financial crisis, questioned the need for firms considered "too big to fail." Instead, she said, the U.S. needs to have a system where one firm can be allowed to fail without the entire system breaking down. That has been the key issue for policy makers trying to stabilize the U.S. banking system. Government policy has been to not let any of the major banking institutions collapse because of the potential follow-on effects to other institutions. Ms. Bair said larger, more complex firms should face additional capital charges, restrictions on leverage and new risk-based premiums as a way to discourage aggressive growth and complexity.

"When a financial system includes a small number of very large, complex organizations, the system cannot be well-diversified," Ms. Bair said. She also used the opportunity to take a swipe at the Basel II international capital framework regulators from around the globe had been working on before the current financial tumult occurred. "In hindsight, it is now clear that the international regulatory community over-estimated the risk mitigation benefits of diversification and risk management when they set minimum regulatory capital requirements for large, complex financial institutions," Ms. Bair said.

The Federal Reserve is planning for the first time to break Wall Street’s hammerlock on so-called over-the-counter derivatives and bring more regulation to the $684 trillion market. The central bank will require more transparency after the unregulated market contributed to the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc. and forced the government to use $182.5 billion to bail out American International Group Inc. The world’s biggest financial companies reported more than $1.3 trillion in losses and writedowns since the start of 2007, in part from derivatives, according to data compiled by Bloomberg.

The biggest sign of the Fed’s intentions came when Theo Lubke, the Federal Reserve Bank of New York official responsible for oversight of the market, said the biggest banks shouldn’t be allowed to dominate trading of the financial contracts, which let investors hedge against losses or speculate on everything from changes in interest rates to corporate defaults. "It is simply unacceptable in today’s environment that the design and structure of the OTC derivatives market can be controlled by a handful of large dealers," Lubke, a senior vice president at the New York Fed, said at an International Swaps and Derivatives Association conference in Beijing on April 22. Lubke, 42, was appointed to police OTC derivatives in 2007 by Timothy Geithner, now Treasury Secretary, when he was president of the New York Fed.

The central bank has pushed banks to speed up confirmation of trades and use clearinghouses for credit-default swaps to reduce the risk of failed transactions. Capitalized by its members, a clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the default risk between parties to a trade. It also allows regulators to assess market positions and prices. The New York Fed got dealers to share power with investment firms by encouraging ISDA to appoint five buy-side firms including Newport Beach, California-based Pacific Investment Management Co. and Elliott Management Corp. of New York to its committee that makes binding decisions on how credit-default swap contracts are settled. Previously only banks made those decisions. ISDA is also located in New York. The comments were "a wake-up type of statement," said Bruce Weber, a professor of finance at the London Business School. Banks have resisted changes to the OTC market because they want to limit competition, he said.

The Fed regulates bank holding companies, giving it oversight for some of the largest over-the-counter derivatives dealers. Lubke’s remarks at the derivatives industry’s annual meeting were made as a representative of the New York Fed. Lubke declined to elaborate on his comments. "There is opacity in the OTC market that doesn’t have commensurate public policy benefits," Lubke said at the conference. "This is not something that can continue." Robert Pickel, chief executive officer of ISDA, which represents dealers, hedge funds and other investors in the privately negotiated derivatives industry, said all types of financial companies deserve representation in the over-the- counter market. "In order to ensure participants have confidence in the operation of these markets, it’s important that they have a say in market developments," Pickel said in an e-mailed statement.

Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather. The U.S. government and the Fed have spent, lent or committed $12.8 trillion to stem the longest recession since the 1930s, which was triggered when credit markets froze in August 2007 after banks found they couldn’t determine the value of derivatives tied to subprime mortgages. Over-the-counter derivatives, such as the $28 trillion credit-default swaps market, complicated U.S. and European efforts to unravel trades between banks. Bear Stearns was acquired by JPMorgan Chase & Co. last year, Lehman Brothers Holdings Inc. collapsed in the world’s biggest bankruptcy and AIG is selling assets after losses from derivatives. All are based in New York.

Credit-default swaps are contracts that pay the buyer the face value of a bond or a loan in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. They are used to hedge against risks and to speculate on a company’s ability to repay debt. "If this market is going to see its maturation into something that works for the benefit of the financial markets and participants as a whole, the arrangements of decision-making over key design elements need to be done in a more transparent manner," Lubke told ISDA attendees. "That includes a broader range of market participants being involved in that process."

New York-based JPMorgan is the largest user of over-the- counter derivatives, with $87.4 trillion in notional value last year, more than the next two largest, Bank of America Corp. and Citigroup Inc., combined, according to the Office for the Comptroller of the Currency. JPMorgan made $5 billion in profit from fixed-income over-the-counter trades last year, according to people familiar with the matter, who declined to be identified because the results aren’t public. JPMorgan spokesman Brian Marchiony declined to discuss Lubke’s comments. The New York Fed pushed last month for the world’s largest banks to offer hedge funds and other clients access to clearinghouses that back trades in credit-default swaps. Intercontinental Exchange Inc. was first to back trades with its credit-default swap clearinghouse, ahead of rivals CME Group Inc. and NYSE Euronext. ICE Trust has guaranteed $257 billion of the contracts since March.

The New York Fed is concerned that credit-default swap clearinghouses lack a common feature of their counterparts for futures, allowing customers to segregate their trading from bank accounts. "Banks and buy-side firms still need to make considerable improvements to both risk management and the design of the OTC derivatives markets," New York Fed President William Dudley said April 1 in a statement. Geithner said in March that the U.S. would for the first time regulate the market, and that clearinghouses for standardized products such as interest-rate swaps were needed to improve transparency. The trading data will be made public so prices are more visible and the Fed will "encourage greater use of exchange- traded instruments," Geithner said March 26 in Congressional testimony.

Dealers such as JPMorgan, Goldman Sachs Group Inc. and UBS AG are working with ICE Trust on a framework in which client funds would be granted protections against counterparty default, such as segregated collateral accounts. The lack of segregated accounts led to losses for funds that posted excess collateral with Lehman Brothers last year after the securities firm filed for bankruptcy protection.This "structural flaw" in the over-the-counter market was evident in the weeks leading to the collapse of Lehman Brothers and Bear Stearns last year, Lubke said. "We saw a tremendous outflow of liquidity from each bank," he said. "Their buy-side counterparties didn’t want to lose their initial margin if there was a bankruptcy proceeding." Lubke, who began his career at the New York Fed in 1995, said there were benefits to the over-the-counter market and that not all derivatives should be made to trade on regulated exchanges. "The challenge is to design policy solutions that can protect the positive aspects of the OTC market while bringing in the important benefits from an exchange environment," he said.

While everyone has been paying attention to the drama surrounding the smaller hedge funds that opposed the Obama administration's plan for Chrysler, arguably the dynamics that led the largest lenders to Chrysler to acquiesce are far more important. Why did Citigroup, Morgan Stanley, Goldman Sachs, and JPMorgan Chase all approve the offer from Washington that gave them 29 cents on the dollar, while the smaller firms held out? A quiet consensus agrees that bank compliance was assured by the Troubled Asset Relief Program and the stress tests. The banks now operate under close supervision of the government. Those that need more capital must stay in the good graces of the government. Those that want to withdraw from TARP and pay back the funds must obtain the government's approval, which is apparently completely discretionary and subject to no checks-and-balances. In short, these banks had no other option but compliance.

Or, rather, they did have an option that they chose not to take. Indeed, part of what has happened appears to be a result of what economists call "agency costs." The management of the banks no doubt recognized that the bank regulators could order them removed if they resisted government plans, a threat reportedly made by Hank Paulson against Bank of America's Ken Lewis when he balked at buying the loss-striken Merrill Lynch. Does anyone seriously doubt, for instance, that Citigroup CEO Vikram Pandit knows his job depends on staying in the good graces of the Obama administration? A wrong move and he could end up as the next Martin Sullivan. Even short of losing their jobs, the bankers know their ability to pay themselves is dependent on government approval. And even worse than joblessness or low compensation numbers could await anyone who crossed the administration. They could be the next Hank Greenberg. So, instead of attempting to get the best deal for their shareholders, the bankers chose the government's plan and preserved their offices.

Politicized lending has always been said to be a theoretical danger of government investment in banks. But the speed with which political control has really taken hold is nothing short of breathtaking. At the very first crisis, we've seen banking decisions controlled by government. And the success of the government in the Chrysler case means that this is not the end point of politicized finance, it is just the beginning. We should expect Chrysler to serve as a model for a new kind of public-private partnership going forward. The system worked pretty well when executives were charged with maximizing value for their shareholders. Under present circumstances, this would have meant bankers daring Obama to let Chrysler slide into bankruptcy without an agreement from most creditors. The path would have been ruinous for Chrysler. There's no way that a Democratic president would ever have taken that path, and the banks knew this. They would have held out for the bailout of Chrysler to be divided in would have delivered something closer to the 50 cents on the dollar that the opposition firms were demanding.

This isn't how a free-market works, of course. The banks would have been exploiting the vulnerability of a political party beholden to union interests. Indeed, there are some who think this is exactly what the hedge funds who continue to oppose the administration's Chrysler's plans are attempting to do. Free market purists reasonably object to this situation. But at least the core principle of maximizing shareholder value would have been conserved. Instead, we've replaced the profit motive with something else, an economically untethered political judgment about the willingness to make sacrifices for the common good.The worst fears of how bailouts of banks would warp the markets were realized in the battle over Chrysler. And this particular horror flick is just getting started.

President Barack Obama’s auto industry policy promises to heighten the influence of lobbyists and to open the door to ethical transgressions and even outright corruption. By naming as car czar a financier who is also a Democratic fundraiser steeped in cozy business-government relationships, and by replacing the traditional bankruptcy procedures with the will of politicians, Obama has injected Detroit with all the elements of crony capitalism. Auto czar Steve Rattner, 56, a top Democratic fundraiser, is an old hand at leveraging political influence into profit, as shown by the business dealings of his hedge fund, Quadrangle Group.

One Quadrangle client was New York City’s pension fund — an arrangement at the heart of recent federal convictions for illegal kickbacks. Federal authorities charged that a "senior executive" at Quadrangle — Rattner, according to the Wall Street Journal — met with a consultant who was looking for places to invest the city’s pension fund money. A short time later, the city invested in Quadrangle, and Quadrangle cut a check to the consultant, who has since pleaded guilty to taking illegal kickbacks. Quadrangle is not under investigation nor has it been accused of wrongdoing in making the payment, but New York’s comptroller is looking into whether the firm failed to disclose the payment. Rattner, it turns out, is also the personal money manager for New York City’s Republican Mayor Michael Bloomberg. In Washington, Quadrangle also seems to play politics for profit. Quadrangle paid $160,000 to the K Street firm Navigant Consulting from February 2005 through the end of 2006 to lobby Congress, the White House, and the Department of Labor on a handful of bills regarding asbestos litigation and compensation.

What was Quadrangle’s stake in asbestos legislation? The firm didn’t return a phone call seeking an answer, but it’s not too hard to deduce. Many hedge funds invested in companies damaged by asbestos lawsuits. These funds then lobbied for legislation that would alleviate some of the liability the companies faced, thus boosting companies’ stock value. Alternatively, a hedge fund could make the opposite play: Watch a vulnerable company’s stock rise as prospects improve for asbestos legislation, then short the company and lobby to kill the bill. Sometimes the lobbyists just acted as intelligence gatherers. A Wall Street Journal article in December 2006 explained the dynamic:

"Some hedge funds, which tend to choose riskier investments that can yield high returns, saw the troubled asbestos companies as attractive. To weigh the value of their investments and decipher bankruptcy-court actions, hedge funds hired teams of analysts and researchers. When Congress began considering legislation to bail out the industry, the funds hired lobbyists to assess its prospects." So Rattner understands how public policy can create private profits. It should come as no surprise, then, that his auto plan involves upending bankruptcy law and precedent in favor of a system in which the winners and losers are chosen by politicians or their appointed "czars."

Rattner and Obama have decided that the United Auto Workers union should get 55 percent of Chrysler. At the same time, they’ve attacked many of Chrysler’s secured creditors — who, in a regular, nonpoliticized bankruptcy, would be repaid in full — for resisting this deal. In a federal complaint, these administration targets alleged: "The government exerted extreme pressure to coerce all of [Chrysler’s] constituencies into accepting a deal which is being done largely for the benefit of unsecured creditors at the expense of senior creditors." For the foreseeable future, Chrysler will be on the federal dole, both directly and indirectly. The Obama-Rattner plan puts UAW in charge of Chrysler, which is good news for the Democratic Party.

UAW’s political action committee spent $13.1 million last election cycle, a slow year for the union’s political arm. Of the PAC’s $2.3 million in direct contributions to candidates and candidate PACs, more than 99 percent went to Democrats. Of 42 Senate candidates to get UAW money, only one was Republican, and that was Arlen Specter. The union’s PAC also reported $4.5 million in independent expenditures supporting Obama, plus an additional $423,000 opposing John McCain. So, here’s the arrangement: You pay your taxes, the Obama administration funnels some of the money to Chrysler, whose profits enrich the UAW, which in turn funds Obama’s re-election. Predictability, precedent and the rule of law have been replaced with the fiat of politicians. Chrysler could become a pass-through entity from taxpayers to the Democratic Party. And in charge of it all is a Democratic fundraiser. Boss Tweed would be proud.

The judge overseeing Chrysler LLC's Chapter 11 proceedings has ruled that the automaker can start taking steps toward selling the vast majority of its assets to Italy's Fiat Group SpA. The judge also said lawyers for a dissident group of lenders have until noon Wednesday to file a list of members with the court, ruling that their identities do not need to be sealed despite reported death threats. After more than seven hours of testimony and legal arguments, Judge Arthur Gonzales approved the bidding procedures for the proposed sale late Tuesday, saying they represented a "clear and orderly process." Bids for all or part of Chrysler's assets must be submitted by May 20, and a determination of the lead bid made by May 26. A final sale hearing would be held on May 27 and the sale could close in as little as 30 days after that. If a sale to Fiat fails to go through, Chrysler will pay the automaker a breakup fee of $35 million.

Lawyers on Tuesday packed the hot and stuffy New York City courtroom for a third-straight business day of testimony in the case, which the automaker hopes will end in a swift exit from court oversight. Attorneys for Auburn Hills, Mich.-based Chrysler LLC argued that the automaker had essentially been up for sale for most of the last two years and that a speedy sale was needed in order to preserve the value of the company's assets. In addition, it's indisputable that the automaker cannot survive without government financing that would not be provided without some kind of partnership with another automaker, Chrysler attorney Corinne Ball said. "It's uncontroverted that time is not our friend here," Ball told the court. "The preservation of value demands that we move forward." Ball pointed to cases such as Lehman Brothers, Bear Stearns and Wachovia as examples of how quick sales at distressed companies can be successful.

Asset sales at companies operating under bankruptcy protection usually are accomplished through auctions, though there generally is a lead bidder, which in this case would be Fiat. The idea is to make sure that the company, and its lenders, get the most that they can for the assets. Chrysler has said that it's open to bids from other parties, but doubts that it would get a better offer than the one from Fiat already on the table. But those representing a dissident group of Chrysler lenders said the sale procedures were designed to prevent other bidders from coming forward and argued for Gonzales to grant more time for potential buyers to do the research they needed and make appropriate offers. On Monday, the same group of lenders had objected to a Chrysler motion to allow the company to access $4.5 billion in bankruptcy financing, saying that it was too closely tied to the proposed sale.

Thomas Lauria, an attorney for the lenders group, argued that no other legitimate bids for Chrysler have surfaced in the last two years because there hasn't been a proper process in place for them to be submitted. Lauria said it's Chrysler's own fault that it waited until it ran out of money to file for bankruptcy protection and potential bidders for the company's assets shouldn't be forced to rush because of the company's actions. "The fact is, the liquidation value of the company was materially reduced over that period of time," Lauria said. "And at the same time, the company was burning up all of its cash and getting ready to tell us all we had a lot of things to do and to hurry up." Early on in Tuesday's hearing, Gonzales ruled that the identities of the dissident group's members do not need to be sealed, despite arguments from their attorney that death threats were made against some of them.

Lauria said the names should be sealed by the court because some of the members had received threats of violence after been singled out by President Obama as the cause of Chrysler's bankruptcy filing. The group of holdout lenders had refused a deal that would amount to 29 cents on the dollar to dissolve what they're owed and go along with the government's restructuring plan for Chrysler. President Barack Obama said Thursday that the lenders were seeking an "unjustified taxpayer-funded bailout" after Chrysler and his auto task force cleared the company's other hurdles, including the Fiat deal and a cost-cutting pact that the United Auto Workers ratified last week. But Robert Hamilton, an attorney for Chrysler, said those threats only amounted to four or five "rants" on a newspaper Web site. Gonzales gave the lenders group until 12 noon EDT Wednesday to file their list of members with the court. Michigan's state attorney general also filed an objection Tuesday over concerns that if the sale to Fiat goes through, the new company formed wouldn't meet obligations to a state workers' compensation fund. But Gonzales said the objection could be resolved later if and when he is asked to rule on a final sale motion.

As the afternoon hearing stretched into the night, Chrysler turnaround officials and executives testified about the events of the months leading up to the company's bankruptcy protection filing. Scott Garberding, Chrysler's executive vice president for procurement, described efforts to form alliances with automakers other than Fiat, including General Motors Corp. and Nissan, in recent years. In addition, Robert Manzo, an executive director with Capstone Advisory Group LLC and one of Chrysler's top restructuring advisers, described how the automaker found itself with few options and dwindling cash in the month leading up to Chrysler's government-imposed April 30 restructuring deadline. "Given the options available over the past 30 days and the lack of liquidity, we could choose a transaction along the lines of the Fiat deal with the help of the U.S. Treasury or face immediate liquidation," Manzo said.

The investment bank Goldman Sachs is back in the black. SPIEGEL spoke with the chief executive of its German operation about finance industry greed, the morals of banking and who should be blamed for the global financial meltdown.

SPIEGEL: Mr. Dibelius, bankers worldwide have behaved shamelessly and irresponsibly in recent months. Do you feel complicit?Dibelius: Yes, and I also want to face up to the debate. In retrospect, some aspects of our industry seem greedy, self-centered and unrealistic, as if the industry had no concern whatsoever for the society around it. And I admit that we did not manage, on the whole, to cope with the expectations society has of us -- as individuals, as institutions and as an industry. Some decisions were made in the euphoria of booming markets. Hindsight is always 20-20. For that reason, it also makes sense that some of these decisions are now being sharply criticized.

SPIEGEL: Perhaps greed is part of the genetic code of bankers.Dibelius: If greed is hereditary, then that applies to everyone, not just bankers.

SPIEGEL: What prompted so many to keep upping the ante, if not greed?Dibelius: It is generally difficult for people to think in terms of discontinuity, that is, to expect the occasional losses. Second, when business is going well, no one pays attention to skeptics. We have seen this with other speculative bubbles, and it would be wrong to believe that they could be ruled out completely in the future.

SPIEGEL: In the past, bankers were the ones with the longer time frames.Dibelius: I agree. In the past, failure was more of an individual phenomenon, but now it's a collective thing. In the past, economies and the flow of information and capital were not as globally interconnected as they are today. There was the occasional serious conflagration, but it always remained local. On the other hand, globalization translated into enormous benefits for the welfare of the entire world. This is often ignored in the public debate. Germany, in particular, has benefited immensely. However, all players must learn to cope with the new nature of risks.

SPIEGEL: Is there criminal energy in your industry?Dibelius: No, but there are individual cases like that of Bernie Madoff, which were able to thrive on fertile ground. As long as everyone was doing well, no one paid close attention. And I admit that the isolated cases have been breathtaking.

SPIEGEL: It was a snowball system. And the best gamblers were those who got out just in time to avoid the collapse.Dibelius: That happens to be the way markets work. Nobody rings a little bell before a market downturn. You always have to make risk-based decisions. The only problem, more recently, was that many people didn't even know where the risks were and what they looked like.

SPIEGEL: There are also moral issues involved. While governments had to spend billions to rescue institutions, financial professionals from AIG to Dresdner Bank were still insisting on the payment of their bonuses.Dibelius: Again, not all bankers have acted the same in this respect. Many are dealing with the issue of bonuses in a very responsible way. However, I do understand the sense of public outrage. Personally, I have always accepted the fact that I have to accept certain losses during difficult times.

SPIEGEL: Georg Funke, the former CEO of Hypo Real Estate, which received billions in bailout funds, plans to sue for outstanding compensation…Dibelius: …I take an ambivalent view of that. On the one hand, we live in a country governed by the rule of law, where such claims can and must be settled in the courts. On the other hand, the individual must also demonstrate that he accepted a certain degree of responsibility, even if he feels that he is personally blameless. To put it crudely: If you fly with the crows, you get shot with the crows. What needs to develop now is "collective humility!"

SPIEGEL: We find it hard to believe that some banks, yours included, are back to booking billions in profits, while the rest of the world is spinning in such a massive economic crisis.Dibelius: Goldman Sachs is not some kind of anomaly. However, our risk management was always respectable. That's why our need for write-offs may not be as high today as one would expect for a bank of our size.

SPIEGEL: Many in your industry seem to believe that the government should stand in for their massive losses, while they should collect the profits.Dibelius: We cannot have losses being socialized and profits being privatized, and I wouldn't think that anyone would seriously defend such a model. "Systemically relevant" may be the ugliest phrase of the year, but the fact remains that the international community cannot avoid rescuing individual institutions, unless it wants to put everything in jeopardy.

SPIEGEL: In October, the US government bailed out Goldman Sachs to the tune of $10 billion (€7.6 billion)...Dibelius: ...which we were more or less forced to accept. Exceptions were not allowed, because the goal was to restore confidence among banks within the overall market. But this was certainly a measure that prevented further destabilization.

SPIEGEL: Come on! Goldman Sachs insured massive assets for ailing AIG. Your investment bank would surely have collapsed without government assistance.Dibelius: It would be arrogant to claim that we would have survived without it. As an individual company, we would have had sufficient reserves. However, when a tsunami strikes, even a champion swimmer like Michael Phelps is going to drown.

SPIEGEL: How can it be fair for banks to be rescued with billions in taxpayer money while millions of people are losing their jobs?Dibelius: The industry to which you -- rightfully so, at least initially -- are assigning the lion's share of the blame for the crisis is currently experiencing the greatest job losses: the financial sector. But even without the crisis-related escalation in the industry, an economic downturn would have happened sooner or later. Economic developments have always been cyclical, although the financial crisis aggravates the situation dramatically.

SPIEGEL: We definitely hold the banks responsible for the current downturn. The auto industry and other sectors are merely paying for it.Dibelius: I don't completely agree. Fundamentally speaking, we were also dealing with a policy of cheap money...

SPIEGEL: ...which the banks were only too happy to take advantage of, if not abuse...Dibelius: ...but it wasn't of their making. Cheap money was also politically desirable. Initially, after the terrorist attacks of Sept. 11, 2001, the government wanted to jump-start the economy. However, another political objective was to ensure that as many Americans as possible could afford to buy a house. In that regard, it was a desirable and admirable policy, and it was successful for a long time.

SPIEGEL: In other words, the politicians in Washington are to blame for everything?Dibelius: As with every major problem, there is not just one guilty party here. In light of the policy of low interest rates and the resulting reduction in risk premiums, the financial industry and its set of tools grew more quickly than the regulatory framework and its effectiveness.

SPIEGEL: How many jobs did your own bank have to eliminate?Dibelius: We are talking about roughly 15 percent worldwide, throughout the entire company. At the height of the boom, we had about 33,000 employees. Today there are about 28,000.

SPIEGEL: Henry Paulson left his position as CEO owning about $500 million worth of Goldman Sachs stock. Last year, during his tenure as US treasury secretary, he allowed his old investment bank competitor, Lehman Brothers, to go bankrupt. Does he also bear some of the responsibility?Dibelius: All of these conspiracy theories are as exciting as they are wrong. The worst of them even go so far as to claim that Goldman Sachs was ultimately behind the entire crisis. Paulson truly doesn't fit the mold of the Hollywood cliché of an investment banker. Anyone who knows him is aware that he is very committed to environmental protection and conservation, that he invested early on in reforestation projects and spent a large share of his fortune...

SPIEGEL: Sure, but if Paulson had rescued Lehman, the world economy would be in different shape today.Dibelius: No one could predict the impact of that decision. And even if the dynamics had been recognized and avoided in time, the bubble would probably have burst somewhere else, where the consequences would have been far more devastating. Until late summer, many still believed that it was nothing but a Wall Street problem. But the risks were already becoming apparent on many balance sheets, including those of German companies.

SPIEGEL: Well, that's certainly a twist: the Lehman bankruptcy as a beneficial catharsis.Dibelius: This bankruptcy was a painful wakeup call...

SPIEGEL: ...for which we should thank Paulson? That's ridiculous!Dibelius: I'm saying that Lehman made the problems clear to everyone all at once. But governments still had the opportunity to react, because the global dimension of the banking crisis had suddenly entered the public consciousness.

SPIEGEL: On paper, the once mythical investment bank Goldman Sachs is now just an ordinary commercial bank. How does that affect your work?Dibelius: So far, little has changed when it comes to our business model. There are two reasons for this. First, why should we revise our strategy during a crisis phase, in the face of so many long-term uncertainties?

SPIEGEL: For one, because the US government is now demanding more transparency.Dibelius: It now has many more options to monitor things. Second, we believe that the future outlook for our business is excellent. We too are not fail-safe, but we have been relatively successful since 1869. In general, however, it is true that the days of perpetual 25-percent after-tax returns in the financial industry are over.

SPIEGEL: The great thing about investment bankers like you is that they can turn a profit everywhere. First you arranged the merger of Daimler and Chrysler, and in the end Goldman Sachs helped break apart the two companies.Dibelius: On balance, I doubt that we made that much on those deals. Besides, it's obvious that I would have preferred to see the merger succeed. Of course, we always try to make the best of a given situation for our clients.

SPIEGEL: And then there was the merger of Karstadt and Quelle to form Arcandor -- a true spectacle for your bank. And what was the purpose of that? Now the company is on the brink of bankruptcy once again.Dibelius: I will not comment on clients. However, we don't have the master plan for the German economy locked away in some closet. You have a false impression of our role. We are a service provider. When we are called on, we try to help. Our role is often overestimated. Our clients are the ones making the decisions.

SPIEGEL: Perhaps the banking world would be different today if you hadn't built yourself up as such an archaically organized, macho business.Dibelius: Now that's really below the belt! In case you haven't noticed, we bankers also live in an enlightened world and help to promote complex processes in a rational way.

SPIEGEL: Is Wall Street's rotten image that unjustified?Dibelius: Yes, absolutely, especially when I consider that our company isn't the only one that promotes women and is involved in social causes beyond the scope of our actual business processes.

SPIEGEL: We have no problem with that. But the picture was long dominated by testosterone-driven Ferrari owners.Dibelius: You've apparently spent too much time browsing through Tom Wolfe's "Bonfire of the Vanities."

SPIEGEL: "American Psycho" offered an especially horrific literary portrayal of the Wall Street investment banker.Dibelius: And Konrad Kujau was part of the German media business. Nevertheless, I would beware of characterizing his forged Hitler diaries as somehow representative of your industry.

SPIEGEL: Is the current economic crisis merely an anomaly or evidence of a systemic problem?Dibelius: It is simply too big to be an anomaly. A number of adverse developments coincided in an unfortunate way. But, for the first time, the international community has demonstrated the will to solve problems collectively.

SPIEGEL: Some cultural critics predict an end to capitalism.Dibelius: A typical reflex. They were saying the same thing about the Internet bubble: that total hysteria would lead to a deep depression. And what happened? Good business models like eBay and Google survived everything and are now contributing in a positive way to economic development. In the same vein, I hope that the current crisis will ultimately help to improve our system, that of a market economy, of course, because everything else was reduced to absurdity throughout history. Freedom and responsibility must be the guiding principles.

SPIEGEL: In France, angry employees have recently started taking their managers hostage. In the UK and the United States, bankers have received death threats. The real question revolves around when this sort of economic crisis becomes politically dangerous.Dibelius: We must all be careful not to allow the development of an isolated elite, otherwise dramatic tensions could develop in our society.

SPIEGEL: In the United States, an intensive search for the guilty is just now getting underway, complete with hearings and lawsuits. Why has it been so unusually quiet in Germany until now?Dibelius: First of all, the US public is far more in tune with what happens on the capital markets than in Germany.

SPIEGEL: You mean because millions of Americans are watching their stock-based pensions go up in smoke.Dibelius: Exactly. Public outrage in the United States over what happens in the financial industry is far more closely connected to politics and the judiciary. Besides, the Americans have a tendency to go to extremes. In one breath, they roll out the red carpet for the economy, and then you see senior executives being escorted out of their mansions in handcuffs. We saw similar things happen in the wake of the Enron and WorldCom scandals.

SPIEGEL: That explains the situation in the United States, but not in Germany.Dibelius: Here in Germany, unemployment is the most important barometer of the public mood. What do you think the reaction would look like if we had five million unemployed? But the unemployment rate is an indicator that lags behind the financial markets. In the end, we could see the executives who are forced to announce layoffs being pilloried rather than those who caused the crisis in the first place. But if anything can change the political dynamics in Germany, it will be that magic number: five million unemployed.

Euro-zone retail sales posted a record drop in annual terms in March, fueled by the sharpest ever year-to-year slump in sales of food, drink, and tobacco, official data showed Wednesday. Sales volumes fell 0.6% from February and 4.2% from a year earlier in March, the biggest annual fall since comparable records began in 2000, the European Union statistics agency Eurostat said. The data compare with a revised decline of 0.3% from a month earlier and a 4% fall from a year earlier in February. February's monthly decline was revised from 0.6% reported in April. Economists expect the European Central Bank to cut its benchmark interest rate to a record low of 1% from 1.25% at its next policy meeting Thursday, but the retail-sales figures could add pressure on the bank to do more to combat Europe's recession. ECB policy makers have signaled that the bank may announce some unconventional measures Thursday to boost lending among banks, but they have also indicated that rates are unlikely to drop below 1% even though inflation is at a record low and is expected to slow further.

The ECB has slashed its key interest rate three percentage points since October, but has been less aggressive in its monetary policy than the U.S. Federal Reserve and the Bank of England, which have cut rates lower and introduced other measures to boost economic activity. The retail data showed that sales of food, drinks, and tobacco dropped a record 5.2% from a year earlier in March following a 3.4% decline in February. Part of the decline may have been caused by the later Easter holiday, which fell into April this year rather than March in 2008. The year-to-year drop in sales of nonfood products excluding automotive fuel slowed to 1.9% in March from 3.1% in February, Eurostat said. The volume of retail sales of food, drinks, and tobacco dropped 1.4% in March from February after easing 0.2% the previous month, while nonfood sales excluding automotive fuel were steady after dropping 0.4% in February.

Forecasts for public borrowing and national debt set out in the Budget by Alastair Darling represent "the worst fiscal outlook since the Second World War", say MPs. The House of Commons Treasury Committee said the Budget forecast by Mr Darling, the Chancellor, of a swift return to strong growth in the British economy was "optimistic". The committee said there was "considerable uncertainty" around the Government's growth forecasts over the next few years. The claims were followed on the floor of the House of Commons by David Cameron, the Conservative leader, challenging Gordon Brown, the Prime Minister, to call a general election, warning the Government was in "terminal decline". After last week's Commons defeat for the Government (over the Gurkhas), Mr Cameron pointed to Cabinet criticism of Mr Brown and told him: "You just aren't up to the job." But Mr Brown ignored his call for an election and hit back, accusing the Opposition Leader of being completely out of his depth on the key issues of the day, like the economy. "Once again you have had to reduce everything to personalities," he told Mr Cameron in a series of ill-tempered exchanges at question time.

In its report on the April 22 Budget, the cross-party Treasury committee warned that Mr Darling's prediction for the UK economy to return to growth of 1.25% in 2010 and 3.5% in 2011 was based on assumptions about a sharp recovery in consumption which may prove excessively optimistic. "Whilst it is possible that the Government will meet its growth forecasts, on the available evidence this is an optimistic assumption," it said. "We question the decision to assume that the economy will begin registering positive growth as early as the fourth quarter of 2009, and that the economy will register such strong growth in 2011. "We are concerned that the sharp recovery in consumption forecast for 2011 might be too optimistic given that the UK economy will only just have emerged from a sharp downturn. "The strong rebound forecast in consumption growth from 2011 onwards has important implications for whether the rebalancing of the UK economy, with a shift away from consumption and a rise in the savings ratio, is merely a short-term phenomenon." It added that it was too early to say whether last November's fiscal stimulus had been successful. The report also warned that there were "considerable uncertainties" about the amount of additional revenue that could be raised by Mr Darling's introduction of a new 50p top rate of income tax on high earners.

The committee doubted whether the introduction of a new 50p top rate of tax on earnings over £150,000 a year would raise as much money as the Treasury had said. The Budget quoted an additional tax yield of £1.1 billion in 2010/11, rising to £2.4 billion in 2012/13. But the select committee said: "We believe that there are considerable uncertainties over the yield to be raised by the 50% top rate of income tax." It called for further consideration of measures to prevent "leakage", or rich people moving away from the UK in response to the change. The MPs said they were "not convinced" that measures introduced to stimulate the housing market would have "any marked effect". On help for homeowners, the committee criticised delays to implementation and confusion as to who qualified for support. It added: "We are not convinced that schemes to boost the (housing) market, such as the stamp duty holiday, will have any marked effect." The committee also said it was "alarming" that Mr Darling had failed to include substantial measures to tackle child poverty in his Budget or last autumn's Pre-Budget Report. On current trends, the Government will miss its target to halve child poverty by 2010/11 by a "significant margin" and Mr Darling's statements have done little to redress the situation, the report said.

It also said the car scrappage scheme, giving buyers of new vehicles a £2,000 discount for ditching those more than 10-years-old, could lead to just 100,000 additional sales. "Although it will support 300,000 new vehicle sales, it is likely that only one-third will be additional sales," the committee said. "Of the additional or accelerated new vehicle sales, just 12,600 could be new UK-manufactured vehicles, although we acknowledge that most cars sold will contain a high proportion of UK-manufactured components and that car retailing will benefit." John McFall, the Labour chairman of the committee, said: "As the Chancellor said, we are living in extraordinary and uncertain times. "However, we are not convinced that the Budget forecasts fully acknowledge this uncertainty. We all want to see a way out of recession, but we need to be realistic." He also raised concern about the "as yet not fully realised" impact of the recession on unemployment, particularly among the young. "We cannot afford to have a lost generation on our hands," he said. The spokesman for Gordon Brown, the Prime Minister, said: "The Government has taken considerable action on child poverty over the years."

And, responding to the committee's concern over public finances, Mr Brown's spokesman said: "Every country has been affected by the global downturn and that has had an effect on every country's public finances." The spokesman said if ministers had not taken the action they had "then the impact on public finances would have been even greater". The committee said it was "very concerned" about the state of the UK public finances as revealed in the Budget. The MPs said it was "critically important" that Mr Darling convinced the public and the City that he had a credible plan to get the Government's books back into balance. "We are very concerned about the state of the public finances," said the report. "What is now of critical importance is that the public, and crucially the markets, believe that the Chancellor is working to an adequate, and credible, plan to restore the public finances to good health. "The credibility of any attempt to restore the public finances will depend on an acceptance that the structural deficit must be addressed as well as the consequences of the current extraordinary circumstances."

UK businesses are significantly gloomier about the cost of bank credit over the next year than rivals in Germany or France, according to a report on Wednesday that suggested continental Europe might have seen the worst of the credit crunch. Almost three-quarters of UK companies expected the cost of credit for companies in their sector to rise in 2009, according a poll conducted by Siemens Financial Services. That compared with about 35 per cent in Germany and 25 per cent in France. The results indicated "that continental economies are over their worst phase, but that Britain has more painful experience to come," its report said.

The contrasting outlooks pointed to diverging trends across Europe, with German and French companies seeing a faster return to more normal financial market conditions. However, the survey of 1,500 companies also made clear that up until now, Germany had been hit to a greater extent and earlier than the UK by rises in the cost of credit and a reduction in its availability. Moreover, the report pointed to the advantage of sterling’s weakness to UK companies, and the smaller role played by manufacturing in the UK economy. Forecasters such as the European Commission and International Monetary Fund expect that overall Germany’s heavily export dependent economy will contract significantly faster this year than the UK’s.

With a return to growth in the eurozone still appearing to be some way off, and inflation expected to turn negative in coming months, the European Central Bank is on Thursday expected to cut its main interest rate by a quarter percentage point to 1 per cent, the lowest ever. It is also considering other measures to combat the recession. Options include a pledge to hold rates at low levels for some time, and possible private-sector asset purchase schemes – which could be aimed at helping companies’ financing. Highlighting the scale of the eurozone’s recession, retail sales in the 16-country region were 4.2 per cent lower in March than a year before – the largest annual drop since record began in 1996, according to Eurostat, the European Union’s statistical office. That pointed to a broadening of the downturn, with the sharp falls in industrial production late last year feeding through into higher unemployment and reduced consumer spending. March’s retail sales were 0.6 per cent lower than in February – the largest month-on-month drop since October.

Britons will have to work until the age of 70, at least five years beyond the current retirement age, if the Government is to stand any hope of bringing public debt under control over the next decade, a report claims. The scale of the debt that Gordon Brown takes on to fight the economic crisis means that future governments will have to consider drastic measures to ease it, according to the National Institute for Economic and Social Research (NIESR). The think tank said it would be all but impossible for the Government to return Britain's total public debt to 40 per cent of gross domestic product, currently equivalent to £600billion, until 2023. The institute said the Government had three options to bring the balance sheet back to good health. The first was to raise the state pension age, from 60 for women and 65 for men, to 70 between 2013 and 2023. Under existing plans, the state pension age is due to increase to 68 for both men and women between 2024 and 2046.

The rise will generate additional tax revenues and reduce pension payment obligations. The second option was to raise the basic rate of income tax by 15p in the pound. Taxes would have to rise by as much as 8p in the pound even if the retirement age was increased, NIESR said. The final option was to cut government spending by a tenth, which would hit the NHS, education and other front-line services. Ray Barrell, a senior research fellow at the institute, said one of these drastic measures would have to be taken to bring the burden of public debt back to internationally-acceptable levels. "The choice is we have got to raise income tax a lot, cut spending a lot, or work longer. There is a stronger case for extending working lives because we're all living so much longer," he said. The report came a day after shares rose sharply in London, and as the pound clawed back ground against the dollar and the euro. Many experts have said the worst of the economic crisis may soon be over.

George Osborne, the shadow chancellor, said the report "graphically illustrates the shocking scale of Gordon Brown's debt crisis". He added: "The Prime Minister didn't fix the roof when the sun was shining and now we will all be paying the price for his mistakes for a generation. "Gordon Brown thinks he can fool the British people by pushing all the difficult decisions until after the election and covering up the mess in the nation's finances with optimistic growth forecasts. "Instead we need real spending restraint now and action to get to grips with our national debt once the recovery is under way." Last month, the Institute for Fiscal Studies calculated that it could take until 2032 for the country to pay debts incurred in the current crisis. The NIESR study is the first time a major institution has outlined how the debt could be repaid. The Government plans to borrow £175 billion this year, the largest sum as a proportion of economic output since the Second World War.

According to last month's Budget, the Government will have to continue with sizeable deficits until at least 2018 because of the significant costs associated with the crisis. In addition, the cash will not prevent Britain's finances from enduring their worst year since 1931. The NIESR predicted that the economy was likely to shrink by 4.3 per cent this year, much more sharply than the 3.5 per cent fall predicted by Alistair Darling, the Chancellor, in the Budget last month. Neither can any forecaster rule out the possibility that Britain faces a funding crisis in the coming years, when investors might refuse to buy government debt. Mr Barrell said any plans to raise the retirement age would have to wait until 2013, when rising unemployment should have passed, after which the Government could gradually increase the age to 70. For each extra year worked, the budget deficit would be reduced by 1 per cent of gross domestic product, NIESR calculated.

The institute also said the Bank of England's attempt to stimulate the economy by spending billions of pounds of newly created money on government debt was misguided and would fail. Martin Weale, the NIESR's director, said the focus of the policy, known as quantitative easing, should have been on buying private sector debt to help companies that were finding it difficult to gain access to finance. "The policy of quantitative easing is completely misapplied," he said. "It is likely to be much like the VAT reduction. It has had some impact but one won't be able to see any clear effect, and it therefore runs the risk of becoming a policy failure. The Bank should have been intervening in the private sector debt market." The warning came on the first day of this month's meeting of the Bank's Monetary Policy Committee (MPC). Members will debate the level of British interest rates and its ongoing programme of quantitative easing. On Thursday, the committee is widely expected to announce that rates will be left unchanged at the historically low level of 0.5 per cent. The committee is also likely to reaffirm the Bank's commitment to £75 billion of spending by the end of June, predominantly on government debt.

House prices continued to fall steeply during April, suggesting that talk of a recovery in the market may have been premature, the latest figures show. The average home in the UK lost a further 1.7 per cent of its value during the month to stand at £154,716, according to Halifax. The annual rate at which prices are declining, measured by comparing price falls during the past three months with the same period a year earlier, also accelerated to 17.7 per cent, up from 17.5 per cent in March and equalling February's record drop. The figures contrast with those reported by Nationwide last week, which showed house prices fell by just 0.4 per cent in April, following a surprise 0.9 per cent rise in March, while the annual rate of decline eased to 15 per cent.

There has been a host of positive data on the housing market in recent weeks, with the Bank of England showing the number of mortgages approved for house purchase increased for two consecutive months to reach a 10-month high in March, although levels still remain well down on a year ago. HM Revenue and Customs also published figures showing the number of homes changing hands soared by 40 per cent in March, and estate agents have reported that potential buyers are returning to the market. The run of good news prompted economists to say that activity in the market has now bottomed out, although they warned that any recovery was likely to slow due to the current economic situation and problems in the mortgage market.

Martin Ellis, Halifax housing economist, said: "Rising unemployment, low consumer confidence and the reduced availability of credit are all expected to exert downward pressure on the housing market over the next few months. As a result, further house price declines are likely." But he added that the quarterly rate at which house prices are falling is continuing to ease, with property losing 3.3 per cent of its value during the three months to the end of April, slightly below the quarterly falls of 5 per cent to 6 per cent consistently recorded between June 2008 and January this year. The house price to earnings ratio, a key measure of affordability, has also continued to improve to 4.26 - its lowest level since the autumn of 2002, and well down on its July 2007 peak of 5.84. Steep interest rate cuts have also reduced mortgage costs, while house price falls have pushed the average cost of a home back down to levels last seen in April 2004.

China, the world’s largest consumer of iron ore, said its major ports unloaded 24 percent more of the imported steelmaking ingredient in April from a year ago, a record for a second month. Ships dropped 53.5 million metric tons of iron ore last month at major ports, the Ministry of Transport said on its Web site. That beats the March record of 51 million tons. Stockpiles at the nation’s major ports reached 62 million tons last month, the statement said. China is seeking to buy 100 million tons of cheaper iron ore from overseas as high-cost domestic mines close, Brazil’s Cia. Vale do Rio Doce, the world’s largest supplier of the material, said last month. International cash prices for iron ore will bottom this quarter because of rebounding Chinese demand, Goldman Sachs JBWere Pty said May 1.

The potential swine flu pandemic has emphasized once again the vulnerability of the global economy to being knocked off an even course by unexpected events, not all of which are as obviously based in past economic policy as the US housing finance disaster. Wars, epidemics, serious terrorist attacks and doubtless in the future ecological crises are all capable of devastating the finely tuned modern economic system. The government panic and misguided activity of the last six months have, however, made one thing abundantly clear: the world urgently needs a better designed paradigm for producing recovery.

Ordinary recessions, a product of a predictable business cycle, don't seem to be much of a problem, and nor do stock market crashes taken by themselves. The last 30 years are full of examples of such events, during which governments either did nothing or confined themselves to moderate monetary and/or fiscal stimulus. In 1987, for example, monetary authorities in both Britain and the United States loosened policy after a stock market crash, preventing it from spreading. Likewise in 2001, both countries loosened monetary policy in face of a stock market crash, though in that case US policymakers kept rates too loose for so long.

The problem is that those remedies, both of which are generally popular with business and the public at large, are only effective when used in moderate doses against moderate, conventionally caused recessions. In 1987, the stock market crash took prices down to reasonable levels, and policy prior to the boom had not been over-expansionary, so stimulus worked well. Likewise in 2001-03, the US budget was close to balance and so the moderate fiscal stimulus of the early Bush years did its job, particularly as it was accompanied by a modest supply-side effect from the 2001 tax rate cuts and a much larger one from the 2003 partial removal of dividend double taxation.

However, loose monetary policy in the US and UK in 1970-73 led to much higher inflation without producing much economic recovery. Similarly, Britain's mid-1970s fiscal stimulus under Harold Wilson produced a sterling crisis but did not cause the economy to recover. Fiscal and monetary stimuli are thus the equivalent of aspirin, effective in small doses against mild illnesses, but ineffectual against major maladies and dangerous if taken in excessive quantities. One need not be a pessimist, as I am, about their efficacy in the current crisis; one need only look at the huge fiscal and monetary stimulus employed in 1990s Japan to realize that fiscal and monetary aspirin can kill the patient if used against a serious disease.

Policymakers therefore need a recipe against serious economic traumas, which prevents these traumas from turning into the Great Depression or Japan's miserable post-1990 trajectory. It is reasonable to suppose that exogenous shocks to the economic system are more likely in a world of globalization, rapid communication and high population density than in the slow-communications, lower-population less integrated world of the 19th and early 20th century. One way or another, we can confidently expect at least one major economic crisis per generation, generally from a cause that is either non-economic or wholly unexpected beforehand, and we had better learn how to deal with them.

The first point to note in dealing with these serious crises is that the policy aspirins effective against lesser economic ills are positively harmful in these cases. This time round, the Bush "stimulus" of 2008 was not only ineffective, it dangerously increased the government's borrowing requirements, reducing financial flexibility and increasing the capital starvation caused by the flight to quality in late 2008. Monetary stimulus used after 2001 to counter the effects of the stock market downturn produced the much more dangerous and widespread housing bubble. The huge additional monetary and fiscal stimuli implemented since September have not yet imposed their costs but may be beginning to do so. The first quarter gross domestic product (GDP) deflator came in contrary to expectations of deflation at a 2.9% rise, while 10-year Treasury bond yields have now broken decisively above 3%. Both inflation and interest rates can be expected to push sharply higher in the months ahead.

To determine the policy response to a serious economic crisis, it is first necessary to consider what you are attempting to achieve: an economy in rapid recovery, generating large numbers of jobs at good pay rates, with capital formation and entrepreneurship active, inflation low or even negative and government reined in, so that the budget is either in balance or moving rapidly back towards it. The best recoveries from economic catastrophe have all taken this form - you can consider the British 1820s' recovery from the Napoleonic Wars and post-war depression, the US 1920s' recovery from World War I and post-war depression; the US 1945-60 recovery from the Great Depression; the German and Japanese 1950s recoveries from World War II; and many others. Even in the Great Depression itself, Britain, which followed these policies, fared much better than the US and Germany, which didn't.

Attempted recoveries from catastrophe that have not taken this form have not worked. The German money printing of 1919-23 led to the Weimar hyperinflation and the impoverishment of the middle class. The British attempt to recover from World War II through Keynesian government spending and economic planning never got off the ground and lagged similar efforts in France and Germany, let alone Japan. Notoriously, Japan's attempt to achieve prosperity through public sector infrastructure in the 1990s didn't work. Russia's post-communist attempt in the 1990s to achieve prosperity through dodgy privatization and cheap money failed catastrophically. In each of these cases, other excuses can be made for failure, but the overall picture is clear: only the hard money, high savings, balanced-budget approach can be relied upon to recover from a real crisis.

These policies have succeeded in the past centuries against wars and major economic collapse, but there is no reason to believe they will not work against other types of catastrophe, such as major epidemics or ecological disaster (which does not include only global warming; economic catastrophe could also result from uncontrollable pollution or a "nuclear winter" period of famine and disruption resulting from volcanic activity). In each case, there would be special factors to be dealt with, such as a catastrophic loss of population, the abandonment of some central economic activity that had caused the pollution problem, or relocation of much of the planet's agriculture or industry to take account of new conditions. Nevertheless, there is no reason why the same central economic objectives should not hold true, whatever the cause of the initial disaster.

If a high saving, low-inflation, reined-in government environment is the necessary state for economic recovery from disaster, then the correct policies to pursue become obvious:

Interest rates should be increased to provide adequate returns for savers and rebuild the capital stock.

Public spending should be reined in sharply, in order to get closer to budget balance without having to increase taxes, which inevitably dampens activity.

Economic losers should be starved of capital and liquidated, in order to free up resources for the new industries that need to arise.

Inflation should be treated as a leper because of its erosion of savings, while a moderate amount of deflation should be welcomed, as it will increase the value of capital and thereby produce more and better new businesses.

Trade should be freed up, in order that new business opportunities appear and Joseph Schumpeter's "creative destruction" can work its magic.

Labor laws should be eliminated as far as possible so that wages and employment can re-set to market levels, while labor mobility within the domestic economy should be encouraged. (However international labor mobility in a recession depresses living standards in the higher-wage economy, allowing unscrupulous employers to drive wages down to Malthusian levels.)

Against a major economic collapse, only these policies will work. They were employed by Lord Liverpool in 1815-25 Britain, by Andrew Mellon in the US in the 1920s, by Dwight Eisenhower and William McChesney Martin in the US after 1951-52 (when the US savings rate was over 10%, far higher than today), by Konrad Adenauer and Ludwig Erhard in Germany from 1948 through 1963, by Shigeru Yoshida and Hayato Ikeda in Japan from 1949 through 1964, and by Neville Chamberlain in 1931-37 Britain. Maynard Keynes would grind his teeth in thwarted academic fury at the policies proposed. He disliked Chamberlain, disdained Mellon and Liverpool and would have hated the others. Yet they - not he - were true architects of economic recoveries and their policies, not his failed nostrums, should be adopted today.

Prediction: The new movie "Public Enemies" will be a mega-blockbuster. Not because everybody loves "Pirates of the Caribbean" star Johnny Depp and Christian Bale, star of "Terminator: Salvation" and "Dark Knight." No, it'll be a blockbuster because we get a chance to cheer for a new dark antihero, the infamous Depression era gangster, machine-gun-toting John Dillinger: Cheer because this new Dillinger is doing what we all secretly want to do -- rip off our corrupt banking system, turn the tables on the guys who have been ripping us off for too long. Dillinger must be the guy former SEC Chairman Arthur Levitt had in mind when he told Fortune: "America's investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask." That was the last recession. Today, it's a heck of a lot worse in the "Great Recession:" Bad banks, financial weapons of mass destruction, AK-47 derivatives.

Yes, this time the banks are the gangsters. They're robbing Main Street's Treasury. And it's an inside job. Hank Paulson, the "Goldman Conspiracy's" Trojan Horse, plays a "Dillinger," leading a much bigger conspiracy, the "Happy Conspiracy," that robbed America's 300 million citizens and taxpayers. They made off with trillions, while our "guards," a clueless Congress, laid down their guns and surrendered the keys to the vault. The "Happy Conspiracy?" Yes, that's what Vanguard founder Jack Bogle calls Wall Street in his bestseller, "The Battle for the Soul of Capitalism." He sees Wall Street as a "pathological mutation" of capitalism. Adam Smith's "invisible hand" no longer drives "capitalism in a healthy, positive direction." Instead, Bogle sees the invisible hands of this elite "Happy Conspiracy" running capitalism to serve its own selfish, greedy agenda:

"Over the past century, a gradual move from owners' capitalism -- providing the lion's share of the rewards of investment to those who put up the money and risk their own capital -- has culminated in an extreme version of managers' capitalism -- providing vastly disproportionate rewards to those whom we have trusted to manage our enterprises in the interest of their owners." Today, the "Goldman Conspiracy" is the visible hand of Bogle's invisible "Happy Conspiracy" that's "ripping us off as massively as a bank being held up by a guy with a gun and a mask." Except today: No masks, no guns. Congress just writes blank checks. The plot's so hot we read all 1,243 comments, emails and links to related Web sites, such as goldman666.com, that were posted on our earlier discussion of this topic. What emerged has the makings of what may be the next mega-successful long-running television series. Here are some plot points for the first season:

Episode 1. 'Goldman Conspiracy' as the new Mafia GodfatherReaders are mad as hell: One simply passed on "the inscription on the very first page of Mario Puzo's "The Godfather:" "Behind every great fortune, is a great crime.' So who'll play the new Godfather? How about Michael Chiklis, the corrupt cop in "The Shield?"

Episode 2. 'Goldman Conspiracy' hires Barney Frank guy as lobbyist Great drama, like "The Sopranos?" A reader sent this Economic Policy Journal report: "The Goldman Sachs relationship with Congress has just gotten even more intimate. Goldman has grown another tentacle, designed to grab directly at the House Financial Services Committee chair Rep. Barney Frank, D-Mass. The new top lobbyist, Michael Paese, was recently the top staffer to Frank. He has been a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank's committee in September." Like Damages and Dexter, you can't just make up a juicy plot like this.

Episode 3. 'Goldman Conspiracy' amassing power to rule the world?One reader said it all: "This is not about political parties, political movements, or control of political theory. This is about power! Pure, in your face, control of every asset and wealth variable in this world. Goldman Sachs and co-conspirators have control and in the best position for control of much of the world's investments and assets." And many don't like what they see: "Stop the looting. Start the prosecutions. Now!" Unfortunately Goldman is real and more dangerous than the conspiracies Jack Bauer destroys in "24."

Episode 4. 'Goldman Conspiracy' is manipulating stock market "Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs," says John Crudele in the New York Post. Stocks prices soaring. "So, who's moving the market?" Not the little guy. "Professional traders, with Goldman Sachs leading the way." NYSE numbers show "Goldman did twice the number of so-called big program trades during the week of April 13," over a billion shares, creating "a historic rally despite the fact that the economy continues to be in serious trouble." Then he tells us why: Because the "Goldman Conspiracy" is using TARP and Fed money, churning the markets. They are "gambling with taxpayer money."

Episode 5. 'Goldman Conspiracy' Cartel? Plutocracy? Dictatorship?"The Goldman Cartel like the Drug Cartel, like the mafia, like communism. Americans fell asleep at the wheel. We have crashed. We were brainwashed that America was good. We pledge allegiance to the flag, etc." Yes many like this reader were angry, ready to fight, near rebellion, because "now we are a fascist nation, maybe worse."

Episode 6. 'Goldman Conspiracy' repeating record 2006-07 earnings In "Goldman Sachs boosts risk-taking at the fastest pace on Wall Street," Bloomberg's Christine Harper writes: CEO "Blankfein has shown no inclination to change the business model that helped Goldman Sachs set industry records for earnings and pay in 2006 and 2007." At the November peak of the credit crisis, he said "nothing that happened this year altered the core of what Goldman Sachs is ... we won't stop doing the things that made us a leading investment bank." Harper added: "First-quarter revenue-per-employee and compensation figures bear that out ... Each of the firm's 27,898 employees brought in, on average, $338,017 in revenue" while "compensation and benefits at Goldman Sachs totaled $4.71 billion in the quarter, an average of $168,829 per employee."

Episode 8. 'Goldman Conspiracy' operates like Las Vegas casino New York Observer columnist Michael Thomas imagines the Wall Street/Washington merger operating as a "publicly owned casino" where "every grifter, sharpie, shark imaginable" gets to play with our money. "This stinks. Stinks to high heaven. Stinks all the way from Wall Street to K Street, whence you can be sure significant funds have been routed to Congress" as political payoff. And it paid off last week in killing a bill to let bankruptcy courts renegotiate over a million mortgages held by underwater homeowners. The bill was defeated by lobbyists for the same banks taxpayers gave trillions to. The L.A. Times reported that the Consumer Federation of America attributed the defeat to the "bankers continuing clout and to the fact that they are major financial players in campaign contributions, to Democrats as well as Republicans." Remember the fun in TV's Vegas?

Episode 9. 'Goldman Conspiracy' is gambling with taxpayer money The New York Times reported in "After off year Wall Street pay bouncing back" that average pay is again around $570,000 at the "Goldman Conspiracy" branch of the "Happy Conspiracy." What a comeback: They were virtually insolvent six months ago till Paulson secretly arranged a $50 billion lifeline in a combo of TARP, Fed credits and the AIG bailout. His old "Goldman Conspiracy" buddies then doctored their balance sheets and it was back to "business as usual," echoing the action in "Prison Break."

Episode 10. 'Goldman Conspiracy' expands in shadowy twilight zone The Fed and Treasury are loaded with Goldman alums, as one reader pointed out, adding three more to Paulson and Neel Kashkari: "Treasury Chief of Staff Mark Patterson, New York Fed President William Dudley and New York Fed Chair Stephen Friedman were once executives, directors or lobbyists for Goldman Sachs." How many more? We have entered "The Twilight Zone," Wall Street's version of "Invasion of the Body Snatchers."

Episode 11. 'Goldman Conspiracy:' No comparison to founding fathers Another reader criticized the false choice: "The difference between our founding fathers and the Goldman Gang is the fact that the former risked their own fortunes while the latter risked yours and mine. These two groups shouldn't even be mentioned in the same paragraph. I vote RICO." Another saw no "change" when it comes to the "Goldman Conspiracy" running our government from the shadows: "It is apparent that Washington lobbyists will not be outlawed, nor Goldman Sachs alumni refused government rule, so nothing will change." Apparently "change" is a great campaign slogan, as long as the "Goldman Conspiracy" gets more control. Think "Terminator" but with no "Salvation."

Episode 12. 'Goldman Conspiracy' really is taking over the world "How far does 'The Goldman Conspiracy' reach? Truth is stranger than fiction," writes one reader. "The Federal Opposition Leader in Australia, Malcolm Turnbull, potentially the next Prime Minister, is a Goldman Sachs alumni. Spooky!" Yes, he was Chairman, Goldman Sachs Australia. We already reported Goldman Trojans in the Bank of Canada and Bank of Italy, and now see Britain's Independent reporting that Paul Deighton, a Goldman banker, is now planner for the 2012 Olympics; Gavyn Davies, a longtime Goldman economist, was chairman of the BBC network; and Duncan Niederauer, John Thain's former deputy at Goldman, was later with Thain modernizing the NYSE.

Episode 13. 'Goldman Conspiracy' ... can't beat 'em? So, join 'em!

"Goldman people are everywhere" observes a reader. "Perhaps we should all buy Goldman stock? Join the party instead of watching from afar. I think it is very scary, no point in having a stock market anymore." Worse, no point in voting, doesn't matter! Thirteen episodes are often the number a network buys for a new series. But expect lots more. This one's guaranteed to go on through at least three more seasons to the 2012 election ... probably indefinitely, because the "Goldman Conspiracy" is secretly expanding beyond Washington ... taking over the networks ... Hollywood ...EU ... UN ... ultimately the universe.Yes, the "Goldman Conspiracy" franchise is more powerful than "Bond," "Batman," "24," "Bourne," "Raiders," "Die Hard" and "The Terminator." See it! Buy it!

Greenpa,this guys attitude still reeks of elitism.He was sharp enough to realize what will happen when the anger level gets to a certain point,except I dont think he has a clue as to the deep set rage I have seen in the steel shops and construction sites around...its not said,or spoke of much,but its there,and still as hot and bubbling as the week that this dreck came out. Folks are smart enough to know the numbers are stroked in the unemployment report.You see the desperate search for work by those who lisened to the ones who kept saying "it will last forever,go ahead and take that second mortgage"and are now looking at ruin. Replacing management should start with a few "frog marches"with as much press as possible...thats the only way you will see any change from the publics attitude about "investing".Why give your hard earned to thieves?

Was listening to Max K broadcast his show in New Zealand, funny stuff.

http://maxkeiser.com/rdu/rdu050509.mp3

to paraphrase the bond market part...

'For 20-25 years, we had a magical bull bond market, bond yields kept inching up every year, and banks could just keep repackaging /reshuffling these bull bonds to delay the maturity payoff day indefinitely into the future.

When ever these bonds came due, they were put on the 'dummy' account, or the offshore account or the shadow banking account, anything but settle them or make them whole. Hundreds of Trillions of dollars of debt were accumulating out of sight, year after year, but still due One Fine Day.All the debts from the catastrophes of the last 25 years, the debts of WorldCom, the debts of Enron, all the debts from Long Term Capital Management, the Asia Financial Crisis, the Mexican Peso Crisis etc.. all these debts are still in the System, they have Never been payed off!

They were just handed off all these years from bank to bank to bank, for a FEE, but of course. As long as interest rates were going down every year, this Massive Fraud (MF)® could be covered up.

Then finally, when interest rates on the 10 year treasury got down so low it couldn't go lower, they perpetrated the Quantitative Easing scam.

Quantitative Easing (QE) is when the government is buying back it's own paper to try and perpetuate this Massive Fraud (MF)®

Max jokes that QE is like the government counterfeiting their own money. hahahaha!

Denninger's metaphor for Quantitative Easing is the 'circle jerk'.

Max compares QE to a dog eating it's own vomit.

That about frames the issue closer to it's true Karmic Nature.

Beranke and Geithner, the Fed and the Treasury, eating each others barf and calling it a seven course meal.

So today I thought about the imminent siezure of our money supply. I still can't decide how sudden I think it will be. I get that we are in a Wyle E. Coyote moment financially speaking - the housing bubble bird has turned 180 degrees very rapidly and we are in a moment of suspended animation. I tend to think we're still pumping our legs and have not yet looked down into the cloud of dust at our feet and realized the solid earth is several paces behind us and all that remains is a yawning chasm 1000 feet deep. It has begun to register that we're just pedalling at air but so far our gaze (present company excepted) has not turned downward.

When will we look down? The consensus here seems to be this summer or autumn. I happen to agree.

I do wonder how long we will fall prior to smacking into the ground at terminal velocity. And here are things that give me hope we might have a little longer (a year or two more) before severe social upset ensues.

1. The system such as it is, is huge. It can soak up shock after shock before buckling (I know, once it does cross the final line all bets are off, yada, yada, yada, the ultimate implosion of such a big system will be much more dramatic than that of a smaller, less integrated one). Still, most Americans are a little off kilter because of the loss of their savings and jobs, but most people still think/hope that we'll go through a few bad years and turn this thing around. If/when that perception changes will be a major inflection point. For example, I over heard co-workers joking last night about letter he just recieved from our employer that it will no longer match contributions to retirement accounts. "Well, now I'll just lose a little less money in the stockmarket". No one questioned the value of continuing to put their money into said accounts.

2. There are still some healthy smaller banks. One of the doctors I work with sits on the board of a local bank and told me that it is "doing better than ever" because it didn't engage in any stupid lending (there was no housing bubble here - fine houses can be had for $50,000-100,000), and it has seen a surge in deposits as people have shifted to it from larger institutions (I wonder how much the big banks have been damaged by that dynamic, and how well they've hidden it).

3. Cars are still selling here. I actually bought a used car today and there was a fair amount of activity on the showroom floor. I expected it to be quieter than it was. The salesman said that April was only down 40 sales from a year prior. I went to a big dealship so I'd believe that it was off 10% or so... His hypothesis for why this region has fared better than most car markets is that there is a lot of natural gas drilling going on. The companies that drill pay royalties to landowners when they produce gas off their land. Land ownership around here is in small enough parcels that there are lots of people recieving royalty checks these days, and despite the drops in nat gas prices of late there has been little slackening of activity on the gas companies' part. I have no idea how much basis in reality this hypotheis has. I find it dubious... still, cars sales are down but not out in NY's southern tier. I also was at a Subaru dealership. I wonder whether the domestics' numbers are as good.

SPIEGEL: What prompted so many to keep upping the ante, if not greed?Dibelius: It is generally difficult for people to think in terms of discontinuity, that is, to expect the occasional losses. Second, when business is going well, no one pays attention to skeptics. We have seen this with other speculative bubbles, and it would be wrong to believe that they could be ruled out completely in the future.

Then later...

D: "But even without the crisis-related escalation in the industry, an economic downturn would have happened sooner or later. Economic developments have always been cyclical, although the financial crisis aggravates the situation dramatically."

One thing I'm curious about with the Zillow numbers is whether they take into account HELOCs. Are they included in the "mortgage" numbers? I'm not intimate with Zillow's methodology, so I don't know.

Lots of people fell for the "take money out of your house! It's like a giant ATM because the value has gone up so much. You'd be a fool to let that money just sit around and not do anything with it!" They might not be underwater, because they still have positive equity in the homes. But if you're carrying a $50,000 0r $100,000 debt on a house where you're $250,000 to the plus side, but then you lose your job or your business slows down so much that you have trouble meeting the payments, you're still screwed almost as bad as someone who's classically underwater. What are you going to do, have a fire sale in a crappy housing market for the place where you live, just so you can pay off what's essentially a second mortgage?

Ditto for the people who technically have their homes paid off. What debts do they have, how hard will they find it to pay them, and does Zillow make any measurements of this? Like a metastatic cancer, when you think you have visualised the entirety of the tumour, sometimes you find there are more tentacles than you thought.

Anywhere between 6 and 10 million people will lose their jobs, millions will lose their homes as well, while those that can hang on lose another 10%+ of their residences’ values, and for many their monthly payments, on Alt-A and Option-ARM loans, will go through the roof. Enjoy your rally if you like, your neighbors may not.hmm... a few months you were saying that we'll be burning furniture to stay warm and such... and that electricity, internet will get knocked out periodically/often...

seems like you're changing your tune.

I've been preparing for the worst, but if you're saying it's getting better, I say you're a fraud, and have been all along. WTF.

Anywhere between 6 and 10 million people will lose their jobs, millions will lose their homes as well, while those that can hang on lose another 10%+ of their residences’ values, and for many their monthly payments, on Alt-A and Option-ARM loans, will go through the roof. Enjoy your rally if you like, your neighbors may not.hmm... that doesn't sound SOOO bad, actually. A few months you were saying that we'll be burning furniture to stay warm and such... and that electricity, internet will get knocked out periodically/often...

seems like you're changing your tune.

I've been preparing for the worst, but if you're saying it's actually going to get better, I say you're a fraud, and have been all along. WTF?!?!?!

Senate Passes Bill to Increase FDIC Line of CreditThe Federal Deposit Insurance Corp., which guarantees bank deposits, will be able to tap a fresh $500 billion credit line through the end of next year under one measure pushed by the lending industry.

The FDIC's reserves, which are funded by premiums the agency charges banks, have been depleted in the last two years as a deep housing downturn and economic recession has pushed many banks over the edge.From CR: Stress test Table

Is anyone familiar with electric vehicles and lithium on this site? I recently read that lithium production annually is 27,000 metric tonnes. 25% of that is used in the manufacture of batteries while 75% goes into pharmaceuticals,ceramics,manufacturing etc. So now the chevron volt plans to use about 16 kilos of lithium per car for storage of electricity. So if we assume that all the lithium in the world is used in battery production for cars then that translates into around 1.7 million electric powered cars annually (there would be no lithium left over for anything else including laptops and mobiles). Now there are some 800 million oil powered cars in the world. So am i correct in assuming that we are never going to be able to scale up electric cars? As it would take 470 years to replace all oil powered cars? (lithium is recyclable every 10 years or so, but what's the net energy?Is it too energy intensive to do so). Also bolivia seems to have vast amounts of lithium but it's very expensive to extract as it's contaminated with magnesium I believe.

The only alternative that I know of then is lead carbon batteries but lead production is past peak I believe,hence all robberies last year where thieves were stealing lead from church roofs even.

There is a 30 year treasury auction today. Although relatively small, any serious weakness will cause headaches not just for the treasuries but all USD bond markets. I'm expecting 'something' to happen today that will cause a decline in equities and a flight to quality. Most likely this 'something' will be worse than expected stress test results.

Last night I watched a PBS production " The Inquisition". I knew some of the history but still learned a lot, especially about the Inquisition's attempts to destroy the disemination of information/ideas by the invention of the printing press. I connected a dot with now, how the press barons are getting upset when the internet eats away at their control of information/ideas. As in the Inquisition eavesdropping seeks independent thinkers,thought that does not align with doctrine/ideology. The current discussion about torture utilizes similar rational. Both the Inquisators and the US administration justify torture as a defense of a way of life. The spirit of the Inquisition is alive and well. Where is our Napoleon to break its grip on " the hearts and minds" of society?I thought Obama was the one.

Greeting to all. I read every day but have been rather speechless as I watch the show. All in broad daylight now....

“Eleanor Squillari, Madoff’s secretary of more than 20 years, told The Associated Press she thinks her former boss carefully orchestrated his arrest and that he’s protecting others who might have been involved in his multibillion-dollar scheme by not cooperating with investigators. She declined to speculate as to whom he might be protecting.”Madoff Protecting Others I’m shocked, totally shocked…

Obama's hands are officially tainted with the blood of innocent Afghans after the latest US Empire "shock and awe" spectacle. The Democrats and Obama, of course, buy into the "War on Terror," so no one should be surprised. The "War on Terror" should be accurately renamed the "US Imperial War for Oil and Power."

It's difficult to understand why renown progressives in North America -- Naomi Klein, Noam Chomsky, Amy Goodman, Matthew Rothschild and others -- never wanted to discuss, let alone advocate or support further investigation of the official 9/11 conspiracy theory. If 9/11 were understood and proven in court to be a false flag operation, the elites would be unmasked. All of their economic and military crimes would be revealed.

The "War on Terror" is a myth, and as long as Americans believe it, they will never awaken to the crises facing our times, let alone recognize the criminal actions of the American Empire.

“Inquiring minds should also consider the Fed Uncertainty Principle.Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.”

Ahimsa,there are things that americans dont want to believe about those who rule them.The evaluations of information avalible are discounted...for to give them credulance is to destroy the careful image that we have built of ourselfs as a wise and good people,ruled by wise and good people.

The folks overseas have clearer eyes than many here...The truth will come out..sometime.Probably when all those who are principals are dead,and beyond punishment.

The war on terror is more about a war on morality. If you think about it, republicans and al qaeda have a pretty similar ideology. They feed off each other. Both invoke religion in their political battles, both view liberals as being morally evil and far too sexually open, both are patriarchies where women are supposed to be below men in terms of rights and status, both are largely men's parties/ movements.

Ultimately it's a power game, both have used the other to gain more resources, more power and influence and use religion, morality, sex etc to get their way. The war on terror is just a 'sexed up' tag line. In the 80's it was the US who openly supported the Taleban in Afghanistan in Russia and Saddam against Iran in Iraq, recall Rumsfeld's visit. It's all a question of what and who is politically convenient at what time so as to be able to gain more power, wealth and influence.

The truth about 9/11 cannot be permitted to be known within the USA or it would destroy the myth of "American exceptionalism," which is the basis of most of the ruling elite's propaganda. The prominent theologian, David Ray Griffin, analyzes this in detail in:

http://www.kpfa.org/archive/id/47346

Beyond mentioning this link, we are forbidden to deal with this issue on this blog. Even the gatekeepers on the left are frightened to take it on at risk of becoming a tin foil hat mockery. If this had not been set in place beforehand, Cheney would never have risked it. Enough said about the name that must never be spoken aloud.

"China has given its clearest warning to date that emergency monetary stimulus by Western governments risks setting off worldwide inflation and undermining global bond markets."

Quantitative Easing, otherwise known as a government counterfeiting it's own money supply, is going to come front and center on the world stage shortly....

"...the report is the latest sign that China is losing patience with the US and aims to diversify part its $1.95 trillion (£1.3 trillion) foreign reserves away from US Treasuries and other dollar securities."

"...They want to buy production rights to raw materials and gain access to resources such as oil, water, and metals. They know they can't keep buying bonds...

..China is irked by Washington's response to the credit crunch, suspecting that the US is engaging in a stealth default on its debt by driving down the dollar."

I am really shocked, dismayed, upset that you, of all people, would use the term "American empire".

Everyone knows there is no such thing. To even suggest it is to deny the benevolence and good intensions of America, the grand and the glorious.

**********

OK, now that you are wondering what I smoked this afternoon, I will say that, of course, there is a U.S. empire, but to speak of an "American empire" is pretty offensive for the Cubans, Nicaraguans, Brazilians, Canadians, etc. who also live in the Americas.

Our choice of words is important and revealing of underlying thoughts, feelings and impressions. I for one would be appreciative and impressed if the U.S. public finally made the effort to come up with a more equitable and accurate name for itself. I have no doubt that the result would be most interesting and, again, revealing.

For what it is worth,(and I hope, Ahimsa, that you are not upset with my stab at humour ;-),